Typically contract to close will be 30-60 days. There are several reasons for this.

The first is your loan.  You can not lock in an interest rate until you have a property (the letter has a rate, but if you read the fine print it will say somewhere that it’s ‘subject to’ an acceptable property…at that time they give you whatever the current rate is.  Once you find a property, a lender will lock you in for 45 days for free, and beyond that you need to pay a rather hefty fee (thousands of dollars).  For that reason, most buyers look to close within 45 days of contract.

Most sellers obviously want a quick close as well (unless you pay a premium to make them wait), so it’s rare to see a closing that is many months away on a resale.

Occasionally sellers will want a ‘rent-back’ or post-settlement occupancy agreement, wherein they reimburse the buyers for their costs to stay in the property for up to 60 days past settlement.  More than 60 days will create problems with your lender, as that’s typically the time frame after which they will consider it an ‘investment property’ and your loan terms will be different.

Buyers should also remember that the first mortgage payment isn’t due until the 2nd full month after you settle.  So, for example, if you settle in April, then your first payment isn’t due until June 1.  This is because you make mortgage payments in arrears, rather than in advance like you do with rent.

Of course every situation is different, but an experienced agent can help you utilize some of the contract’s clauses to minimize any overlap between your lease and your mortgage.  Every situation is different, so contact us to discuss your rent-to-own transition or attend a free first time home buyer class.

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Let’s review terminology first. When you make a loan application, a lender is required to provide you with a Good Faith Estimate (GFE). Most lenders provide you with this estimate even if you haven’t made a full application yet. The GFE contains three main parts: your rate/point combination, your monthly housing payment estimate, and an estimate of your closing costs. Though lenders are required to give you an estimate of closing costs—which run 2.5% to 3% in this area—they actually have no control over most of the fees shown! So be warned: do NOT compare lenders based on total closing costs! There are too many places they can under-estimate to make themselves appear more competitive.

The GFE closing cost estimate is an estimate of what will ultimately be shown on the HUD-1 at closing. The HUD-1 is a standard government form with each line item numbered for easy comparison. GFEs, on the other hand, come in a variety of format, further complicating comparisons.

Generally the expenses on GFEs and HUD-1s will fall into these categories:

Read more: “Junk Fees”

Read more: Title Insurance

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Let’s back up a moment, and put “as is” in the context of a “regular” (i.e., non-REO) sale. “As Is” is a commonly misused term. We first must understand the home inspection process and one particular paragraph in the regional sales contract – the Property Condition paragraph, also known as paragraph 7 (because it’s literally paragraph #7 in the contract…sometimes we agents aren’t all that creative.) Paragraph 7 indicates that the systems of the house, including plumbing, electrical, and appliances, must be in “normal working order.” Unless the parties agree to strike through this paragraph, that means the seller must ensure all of those systems work at the time of settlement.

Beyond that, buyers may wish to also get a home inspection (highly recommended). If the home inspector notes items related to plumbing, electrical, or appliances that are not in “normal working order” then the homeowner must fix these—they’ve already agreed to based on paragraph 7. Any OTHER items the home inspector may find—e.g., foundation problems, roof problems, window/door problems, etc.—are negotiable.

Sometimes a listing will be marked “as is” but technically, unless they’ve crossed through paragraph 7, or unless an addendum supersedes paragraph 7 (see Bank Addenda post here.), then the seller is still obligated to fix those systems of the house indicated in that paragraph. They’re simply telegraphing to potential buyers that they will not repair or provide a credit for any additional items.

In a foreclosure, banks always say “as is”, and most Bank Addenda trump any inspections that you may think you’ve negotiated. The last thing a bank needs is the back and forth negotiating to give a buyer a small credit for some electrical problem—they’re way too busy and have tons more foreclosures to get off their books. Most banks though, do not have a problem with you having a home inspection; they just want a “go or no go” decision immediately following. You either take it as it is with the inspection findings, or void the contract. Tip: Even when a bank allows you to do an inspection, make SURE it includes a “right to void” based on the results!

You should always try to get an inspection so you know what you’re getting into with an REO property. It’s a sad fact that many frustrated borrowers take out that frustration on the property on their way out the door. (Read a WSJ posting discussing that approximately half of all bank-owned properties have “substantial” damage inflicted by angry homeowners prior to vacating. ) Often the repairs are simply cosmetic—a good scrubbing, some patched drywall, missing cabinets or appliances, or a fresh coat of paint—and those are good opportunities for a quick bargain. But structural and mechanical issues can easily run into the tens of thousands of dollars. And once settlement occurs, you have no claim against the seller, even if there was a problem that wasn’t disclosed to you (unlike other transactions). So remember that taking on that additional risk requires an additional reward, in the form of a very discounted price; otherwise that bank owned property isn’t such a good deal after all.

Read about some other risks of foreclosures here:
Foreclosure Risks: Title Defects
Foreclosure Risks: Bank Addenda
Foreclosure Risks: Unpredictable Transaction Timing
Foreclosure Risks: Financing Complications

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Many real estate sellers and purchasers wonder if they need to hire an attorney to represent their legal interests during the course of the transaction. The answer – predictably – is it depends.

In some parts of the country it is routine for both parties to a real estate transaction to engage counsel. I know this because clients coming from New York and Boston expect to need a lawyer. In California and other west coast states, the real estate transaction is treated more like a financial transaction and there is little attorney involvement, with closing or “escrow” services provided by the bank or mortgage lender.

In the Washington D.C. Metropolitan area a sort of middle ground approach as evolved over the last 20 years or so. Most real estate settlements are handled by non-attorney Settlement Companies or Title Companies. Most of these companies affiliate with law firms to provide certain necessary legal services, like the drafting of Deeds, Powers of Attorney, and other legal documents.

In the vast majority of cases, neither the Purchaser or Seller hires their own attorney, but both agree to allow the Title Company’s affiliated attorney to provided certain legal services and acknowledge the potential that legal conflicts of interest may arise. Contract negotiations, both before and after ratification, including home inspection and other issues, are handled by the Real Estate agents. Occasionally issues arise that the agents cannot resolve without attorney involvement. For instance, there may be a difference of opinion about whether a lien on the property is a cloud on title that would allow the Purchaser to get out of the contract, or what responsibility a Seller has to remedy an encroachment shown on their house location survey. In those cases, the Title company attorney should have provided a list of three independent attorneys for the parties to engage.

In some cases attorneys are engaged from the start. In many Estate cases, for instance, attorneys are hired to handle the sale of property where there are a number of heirs involved in the transaction and there will be additional documentation require to convey clear title. In commercial transactions the parties almost invariably use attorneys throughout the process to draft contracts (as opposed to form contracts usually used in residential transactions) deeds and loan documents.

For most sales, however, from the $300,000 condominium, to the $3 million mansion, the parties rely on their real estate agents and an experienced, competent, and professional Title Company attorney to guide them through the process and help mediate any issues before they become disputes.

Marcus Simon

Founder, Ekko Title

Partner, Leggett, Simon, Freemyers & Lyon, PLC

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In a typical transaction, you make an offer, the seller takes a day or so to review it and either a) accept, b) counter, or c) reject. If you’re concerned that a seller might be “sitting on the offer” to wait for a better one, or even “shopping it around” by calling all the agents who have previously visited the property to see if they can scrounge up a competing offer, then you might consider including an expiration or exploding clause. These clauses state that the offer will expire by x time and date if not responded to in writing. It’s a great way to protect a buyer and maximize your chances of a quick turnaround.

However, with a bank owned property, the bank takes as long as they darn well please. Might be a day, might be a month, might be several months. They don’t really care about your expiration clause. Well, maybe not that they don’t care, it’s just that they’re a big corporate entity, and your offer is likely to be sitting in a pile of paperwork that needs to get done asap, but the individual sitting in a cube somewhere really doesn’t have the right incentives to make sure he gets to your offer today, or tomorrow, or the next day.

In the meantime, you’d be wise to keep looking at properties to see if there’s anything better that catches your eye. As a buyer you have the right to withdraw your offer anytime before the bank gets back to you. In reality, the bank’s response will NEVER be an “accept.” Rather, it will ALWAYS include that pesky Bank Addendum that you will have to read (please, I beg of you, read) and sign before your contract becomes official.

Once you’re ratified, is it time to give notice on your lease and call the movers? Hardly. Remember one of the common clauses is for the bank to give themselves the right to back out at any time. I’m not saying the bank does this out of malice…there are a million reasons (deed issues or delays are common) the bank might be very willing, but simply unable, to proceed to settlement. (You’d be out the cost of your appraisals, inspections, moving deposits, etc in this case.) As an aside, you can be sure that one of the clauses in that Addendum imposes a hefty daily financial penalty on the buyers if they aren’t ready for settlement on time, so apparently what’s good for the goose is NOT good for the gander.

Other than not being sure when to start packing, this open-ended timing creates issues with financing. Most loans are locked for just 30 days, and after that you need to pay a fee to maintain the lock. If you pay the fee, you may be out that money and never close. If you don’t pay it, and rates change, you may be in an even worse situation—in fact you may not even qualify for the loan anymore if rates change too much! Make sure you fight hard for a financing contingency that will protect you in the even that settlement gets delayed. (Side note—often banks will offer to give you financing in the event of problems…but they never specify the terms!)

So when can you start making plans? Not until the deed has been recorded, which is typically the day after settlement. Yes, you read that right. Don’t make any plans to move until a day AFTER SETTLEMENT OCCURS.

If your lease is up soon without the option to go month-to-month, make sure you have a back up plan for where to stay in the event of unforeseen delays. The timing risk can be partially mitigated by 1) continuing your search knowing you have the option to walk away and 2) keeping a financing contingency. But chances are strong that you’d incur extra expenses, along with sleepless nights, along the way.

Thinking of buying a foreclosure? Contact me to discuss the other risks and how you might be able to mitigate some of them. Remember, it’s not a bargain if you’re taking on too much risk for not enough reward.

Read the next post in the series on Foreclosure Risks: Property Condition & Inspections

Read more on the differences between short sales, foreclosures, and REO properties.

Read the first post in the series–risks related to Bank Addenda–here.

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First, a few clarifications. Both buyers and sellers have closing costs in a transaction; the sellers’ are typically much higher (because they pay both real estate brokers) than the buyers’. These fees are typically paid at closing—they come out of the sellers’ proceeds, and the buyer can either pay cash, or can negotiate to have their portion of the closing costs paid by the seller (read more here.)

For this post, I’ll focus on the buyer’s fees. A lender should provide you with a Good Faith Estimate (GFE) when you apply for a loan. This GFE is essentially an estimate of your “HUD-1” form, which you will receive at closing. Each lender has their own preferred format, but you should be able to compare apples-to-apples by looking at the section headers, or, even better, the line item numbers. It’s important to note, though, that lenders only control certain sections, while others may be simply based on their own experience. When comparing lenders, it’s important to focus only on the line items that the lender actually controls.

The fees vary by jurisdiction, broker, and settlement attorney, but a good way to categorize them would be:

• Prepaids – These are generally required by the lender, and may include prepaid insurance, prepaid property taxes, and prepaid interest. Another common prepaid item is condo/HOA fees. These vary based on the day of the month that you close, since they are pro-rated between buyer and seller.
• Points – A point represents 1% of the loan balance and are charged by lenders. This, along with the fees, can easily amount to thousands and thousands of dollars, so it’s important to discuss this with your agent and your lender.
• Fees – These are fees charged by real estate brokers, settlement attorneys, and lenders, and are the toughest to judge for “reasonableness” without experience. These vary widely, particularly among lenders. Some real estate agents will pay their broker’s fee on your behalf—be sure to ask them. For lenders, whose fees can be substantial, it’s important to know early in the process what they’ll charge. These fees can generally be found on your Good Faith Estimate in the 800 section, but look in the 1300 “Additional” section too. Broker’s and attorney’s fees are scattered throughout the closing statement sections.
• Title Insurance – This is paid by the buyer and, depending on the policy, can amount to thousands of dollars. It’s a one time charge that covers you in the event of a problem with the chain of ownership. See my post on how to save some money with title insurance here. This is in the 1100 section.
• Government and Transfer Charges – Paid to the local jurisdiction. These can be quite substantial—for example, in the District of Columbia, the transfer (paid by the seller) and recording taxes (paid by the buyer) are 1.1% each. Northern Virginia sellers just had big increase (from $1 per $1000 in value to $5 per $1000) in their transfer taxes.

Read more about how to spot “junk fees” in my post here. This is just a high level summary of some of the most common items on a HUD-1, so be sure to ask your agent to walk you through the expenses and strategize with you on how to keep them to a minimum!

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Closing costs come off of the seller’s “net” or the amount of proceeds after expenses. Let’s say the seller is listing his home for $450,000 and his selling expenses (fees, etc.) are equal to 8% of the transaction. If he were to receive his full asking price, his “net” would be 92% of the total, or $414,000. In this example, the buyer would need to pay $13,500 in closing costs (3%) + his down-payment.

One negotiation tactic that is very common in this buyer’s market is to ask the seller to pay a buyer’s closing cost ($13,500 in our example), so that the buyer minimizes the amount of cash they need to spend to get into the house. The buyer may actually have the cash, but might prefer to hold onto it as savings, or apply to his down-payment, remodel a bathroom, to buy furniture, or whatever. Tip: You may see “seller contribution” clearly advertised in a listing—don’t let this drive your decision too much—in this market, almost any seller would be happy to contribute to your closing costs whether they advertise it or not. By stating it in a listing, though, in essence these sellers are simply saying “I’m willing to take less than list price.”

Now, getting back to our example, let’s say that a buyer wants to make an offer on that $450,000 home, but after discussing it with his agent, wants to pay only $430,000. (And for purposes of this example, let’s assume that the seller wants to “net” the fair market value of $430,000.) The buyer may offer less, or may ask for closing cost assistance, or a combination. So if the buyer wants his closing costs paid for, he might offer $443,500 and ask for a seller contribution to closing costs of $13,500. The seller then nets $430,000. The buyer would borrow the full $443,500—in essence “financing” his closing costs across the life of the mortgage—but would only need to write a check for the down-payment at closing.

Taking it one step further, if a buyer were to ask for both a price concession AND closing cost assistance, the seller would apply both to his net. In our example, it’s unlikely the seller would accept an offer of $430,000 AND provide a full $13,500 contribution because his net would only be $416,500 rather than the market value of $430,000.

From a buyer’s perspective, asking for closing costs is a good way to minimize cash out-of-pocket in the short term, but the trade off is that the buyer is paying interest (via the higher mortgage) for potentially years. Be careful, though—many lenders have a limit of how much a seller can contribute; they want you to have some “skin in the game” in today’s market! Additionally, review your contract carefully—sometimes any excess contribution is returned to the seller.

From the seller’s perspective, the financial difference of giving a price concession or a closing cost contribution is usually immaterial—the impact to the net is essentially the same. (The only difference is that any fees that are based on a percentage of the transaction price will be slightly higher; in our example, they would be based on the $443,500, and not the net of $430,000. Still likely a very small price to pay to get a buyer to the table!)

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Mortgage Interest – Most homeowners are well aware of the mortgage interest deduction, as this is typically a large amount that makes the decision to itemize on Schedule A a no-brainer. You’ll receive a Form 1098 from your bank with the amount you can deduct on Schedule A. For most first time borrowers, but bulk of your mortgage payments for the first few years are mostly interest, so this one adds up quickly! Interest on second trusts and Home Equity Lines of Credit (HELs or HELOCs) are also deductible within certain guidelines. (Note: If you find that you are receiving a very large refund, you may wish to adjust your withholding using the IRS’ calculator here. )

PMI - Private Mortgage Insurance (PMI) is now tax deductible. But look out – this only applies to loans originated in 2007, so not everyone will benefit. There are also income limitations, and at least so far, this is just a one-year deal, so don’t assume you can deduct it in 2008 and beyond. (Update Dec 2007: Congress extended the deduction for mortgages originating between 2007 -2010. Families with AGI up to $100K are eligible for the deduction, with the deduction being phased out up to an AGI of $109K.)

Points – Points—that is, mortgage interest that you prepaid at settlement—are also deductible. A point is equal to 1% of the amount borrowed. This one may or may not be on your 1098, but will be on your HUD-1 settlement statement from your closing. Can’t find your settlement statement? Ask you agent or settlement attorney for another copy. Some agents (myself included) automatically mail another copy to clients in the beginning of the year following the purchase. If you refinanced this year, then points can be deducted over the life of the mortgage.

Property Taxes – Your real estate taxes will also be deductible on Schedule A. It’s easy to forget this deduction because most lenders collect it from borrowers as part of their monthly mortgage payment, and pay the local jurisdiction on their behalf. If you’ve prepaid, then the payment is deductible in the year of actual payment. So don’t forget to check that settlement statement to see if you prepaid any taxes that your lender may not be reporting!

District of Columbia First Time Buyers - First time buyers that settle on a purchase in DC before December 31 may get a $5000 credit (not a deduction–an actual dollar for dollar offset on money owed!) on your Federal Taxes. That’s the same as Uncle Sam giving you $5000 of your hard earned money back just as a ‘thank you’ for buying in the District. Use IRS Form 8859. Also, DC buyers—don’t forget to apply for the homestead exemption that exempts the first $60,000 of value of your primary residence from property taxes.

Relocations – If you moved as a result of a job change, many of your unreimbursed moving costs may be deductible.

Upgrades and Updates to Your Home – If you made certain energy-efficient updates to your home in 2007, including high efficiency HVACs, new windows or doors, or tankless hot water heaters, you can qualify for a tax credit. Read more here.

Capital Gains – The first $250,000 in profits from the sale of your home ($500,000 if married filing jointly) is generally tax-exempt if the property was your primary residence for two of the last five years.

Now for the bad news: Some costs are yours alone—don’t try to deduct these expenses: HOA or Condo dues (though the property tax portion of co-op fees may be deductible–consult a tax advisor), property insurance, depreciation, general closing costs, repairs and maintenance, or local assessments that increase the value of your neighborhood (like installing sidewalks.) But hold on to any receipts; certain property improvements add to the basis of your home, and can help exempt profits when you sell.

While organizing all of the paperwork may take a little more time than was required when renting, the result is well worth it for most new homeowners. You may be pleasantly surprised with the difference in amount owed versus what you paid as a renter. Think of it as Uncle Sam’s way of subsidizing your housing payment.

General disclaimer: This advice is not intended to apply to all situations, as exceptions and limitations apply. Please consult a tax advisor for your personal situation. IRS guidance can be found at www.irs.gov

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The localities affected by the increase are: the City of Alexandria, Arlington County, City of Falls Church, City of Fairfax, Fairfax County (including the Towns of Clifton, Herndon and Vienna), Loudoun County, City of Manassas, City of Manassas Park, and Prince William County.

So sellers, push for a 2007 closing. And if you’re a buyer who is indifferent about when to settle, offer to settle in December and ask for half of that savings back as a closing cost credit – it’s win-win!

Thanks to Marcus Simon at MBH for this reminder!

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You may recall that the rule had expired in early 2006, but was approved during the final Congressional session of last year, and made retroactive to the delight of many 2006 buyers. It expires again at the end of 2007 (next month.) Even if you own a home somewhere else (including the D.C. suburbs), you can qualify for this tax break if the house you buy is the first one you own in D.C. In fact, you can qualify even if you have owned a home in D.C. before—as long as you have not been an owner for at least one year. There is, however, a phase out based on income limits: between $70,000 and $90,000 on single returns and between $110,000 and $130,000 on joint returns.

$5000 would make a nice Christmas bonus, no?

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