Owners Forced to Become Landlords + Tips for a New Landlord

A growing number of homeowners are finding out what it means to be a landlord after failing to sell their homes in one of the worst housing slumps in history.

With home prices down nationwide, many don't want to take a huge loss when they decide to move. They want to wait to see whether they can rebuild their equity. So they rent.

"People just really don't want to be landlords, and they really have no choice," said Dennis Dickstein, a Realtor at Real Estate One in Farmington Hills, Mich., who estimates that 20 percent of his deals are leases.

Mark and Rhonda LaVelle decided to buy a bigger home while the market was down. The couple had a 1,100-square-foot house in Royal Oak, Mich., to sell but decided to move when they found a 2,300-square-foot home about 2 miles away. They started renting their house in January after it had been on the market nine months.

"After paying two mortgages and the house wasn't moving, we were at a point where we would have to sell it at a substantial loss or get someone else in who could pay the mortgage," said Mark LaVelle, 38, a freelance cameraman.

He and Rhonda LaVelle, 37, a television-news producer, turned the leasing over to his real estate agent.

"It's been a great experience. We're getting the full mortgage payment from the tenants," Mark LaVelle said. "My wife just wanted to wash her hands of the whole thing. She looks at it like a liability. I look at it as an investment."

But it's not always moving up that sparks a home rental.

Sometimes it's a life change, such as marriage, college graduation, divorce or death in the family.

Many homeowners who decide to lease their homes use their real estate agents to handle the transaction, including background and credit checks.

The service generally will cost a landlord one month's rent, while property management could cost 10 percent-20 percent of the monthly rent. But with rent often set just high enough to cover the mortgage payment, some landlords do it themselves.

Dan Elsea, president of brokerage services for Real Estate One in Southfield, Mich., advises landlords not to be too turned off by potential tenants with bad credit.

"The people coming to them have gotten rid of their biggest expense, their mortgage, when they arrive at the door. They arrive with a reasonably clean income statement if they have a job," he said. "You should look at the credit report, but don't scrutinize it too closely. References are just as important."

Other real estate agents agree.

James Silver, an agent with Keller Williams in Troy, Mich., said there are many good tenants to choose from.

"As long as you get everything ... a credit report, the last few pay stubs, references. As long as you have everything in front of you, you're fine," Silver said.

And the beauty of the rental market is that prices there have not fallen by 40 percent, as many parts of the sales market have. The reason is there are a lot of renters to feed demand.

"So many people have lost their homes ... they are looking for a place to live," said Linda Hiller Novak, a Realtor with Max Broock Realtors in Birmingham, Mich.

There are horror stories, of course, for untested landlords. Some learn quickly that the old saying, "Possession is nine-tenths of the law," is true.

Steve Cole, an agent with Coldwell Banker Weir Manuel in Birmingham, said he knows a homeowner in Birmingham who rented his house to tenants who not only didn't pay rent, they trashed the home before the landlord could evict them.

"When times are tough, people look to scam," Cole said.

Tom Youngblood Jr., a 38-year-old human resources director, is renting his St. Clair Shores, Mich., home to a responsible tenant after having to evict the first one.

He was lucky. First off, a court clerk helped him figure out how legally to evict the tenant. He had to give the tenant seven days' notice to pay or face eviction. Then he filed eviction paperwork with the court.

Last December, a judge ordered the tenant to pay or be out in 10 days. She chose to leave and did not damage the home, he said. If the tenant had not moved out within 10 days, a court officer would have done it for her.

It can take from 27 to 57 days to evict a tenant, according to the Michigan State University College of Law's Rental Housing Clinic.

Youngblood's home is now being rented by Danette Trice, 30, an engineer design specialist at AT&T in Mt. Clemens. She had been living in Eastpointe, Mich., with her son, Ephraim Gibson Jr., 4.

Ephraim has bronchitis, and the two had to move because the air-conditioning wasn't working at their house. Her real estate agent helped her get a $100-a-month reduction in rent and made air-conditioning a requirement in the lease.

"I didn't have to do this or that to move in," Trice said. "There was new cabinetry in the kitchen, the appliances were nice and the tile was nice."

Dickstein helped Cyndee Pote, who works in advertising and marketing for Real Estate One's corporate offices, lease her home earlier this summer after Pote, her husband and three children moved to a 2,400-square-foot home in Bloomfield Hills.

Pote and her husband, Jason Pote, had their 980-square-foot house on the market for a year with no offers. Houses in the neighborhood were going for $50,000, and she had paid $94,000. Once it was put up for rent, the showings increased, and they had it rented within a week.

The young man who rented it lived just 10 houses down the street and was losing that rental because the owner let it go into foreclosure. Dickstein did a background check, a credit check and contacted the renter's employer before letting him rent the home.

"The rental market was strong. We were able to cover our mortgage and then some," Cyndee Pote said.

———

TIPS FOR A NEW LANDLORD:

Call a private investigator. For less than $50, you will find out whether the prospective tenant is a deadbeat right there and then instead of finding out after he or she owes you three months' rent and you have to evict. —Tom Youngblood Jr., landlord

Don't be scared by bad credit. Renters who lost their homes come to the landlord having gotten rid of their biggest expense — their mortgage. If they have a job, they are pretty good tenants. References are as important as the credit report. —Dan Elsea, Real Estate One

Use a standard lease contract, have a lawyer review it to avoid surprises. —Mike Balduf, landlord

Have the tenant provide a copy of his or her credit report, references and proof of employment. Contact the employer to ensure the potential tenant is working there. —Katie Hill, Realtor with Real Estate One in Troy, Mich.

Find out whether your city or township requires you to have a permit to rent out the house and pay the fee. Do everything by the book. —Mark LaVelle, landlord

Request wire transfers and automatic deposits for monthly rental payments to avoid being scammed by people who don't want to pay. Fraudulent checks and cashier's checks are easy to create on a personal computer. —Steve Cole, Realtor with Coldwell Banker Weir Manuel in Birmingham, Mich.

HOW TO KEEP IT LEGAL:Here are some tips from Brian Gilmore, director of Michigan State University College of Law's Rental Housing Clinic in East Lansing. Although the clinic primarily assists tenants, it also answers legal questions from landlords.

Key things to put in the lease include the duties of each party. For example, it would include the dates that the lease is active, the rental amount, deposit and how repairs and maintenance would be handled.

By law, the security deposit cannot exceed 1 1/2 month's rent. If the monthly rent is $600, the most that could be collected for the security deposit is $900.

The tenant has a right to put the rent in escrow instead of paying the landlord if the property is not up to code. Until fixes are made, the rent can be withheld to force the landlord to comply with codes.

Some communities charge rental permit fees. If those are not paid, that can invalidate the lease.

The landlord can evict a tenant for damaging the property. The landlord has to deal with normal wear and tear, but serious damage is a valid legal reason to evict.

(c) 2010, Detroit Free Press.

FHA Gives Home Buyers 1 Month

The Federal Housing Administration (FHA) is giving homeowners and buyers until October 4 to lock in a low monthly insurance premium, according to Gibran Nicholas, chairman of the CMPS Institute, an organization that trains and certifies mortgage bankers and brokers. “After October 4, the monthly insurance premiums on FHA loans will increase by over 63%.”

What does this mean for home buyers?A home buyer purchasing a $200,000 home using a $193,000 FHA mortgage before October 4 would pay an insurance premium of $88.46 per month. If the same home buyer waits until after October 4, the insurance premium would jump to $148.01. 

“In this example, the home buyer would lose $59.55 per month, or $7,146 over a 10-year timeframe,” Nicholas said. “Although the upfront mortgage insurance premium is going down after October 4, the real impact to the home buyer is actually a net increase in their out of pocket costs because the monthly premium is going up by 63%. Remember, sellers can pay the upfront premium or it can be financed into the loan amount, so homebuyers rarely pay the upfront premium out of pocket. On the other hand, the increase in the monthly premiums will be paid right out of the home buyer’s pocket with their mortgage payment each month.”

Ironically, home buyers who plan to be in the mortgage for less than three years and decide to pay the upfront fee themselves (instead of having the seller pay it for them), may actually save money by waiting until after October 4 to apply for an FHA loan. 

“Home buyers with a short term time horizon may actually benefit from this change because the upfront premium will be reduced to 1% from 2.25%,” Nicholas said. This change will impact over 30% of the home buyers in today’s market who use FHA-insured financing.


rismedia

Sales Fall, Prices Rise

Existing-home sales were sharply lower in July following expiration of the home buyer tax credit but home prices continued to gain, NAR says. Existing-home sales dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009. Sales are at the lowest level since the total existing-home sales series launched in 1999, and single family sales--accounting for the bulk of transactions--are at the lowest level since May of 1995. "Given rock-bottom interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly if the economy consistently adds jobs," says NAR Chief Economist Lawrence Yun. Even with sales pausing for a few months, annual sales are expected to reach 5 million in 2010 because of healthy activity in the first half of the year. 

Today's Best Strategy to Get It SOLD!

—Price it right. Buyers have access to lots of data, and they'll know if your house is too expensive.

—Offer to pay some of the buyer's closing costs.

—Maximize exposure. Saturate the Internet and all forms of social media with your listing.

—Use great photos, not good ones. Make sure your house makes a great first impression.

—Make it sing. Listing information must be complete and well-written.

—Curb appeal matters. Spend a little money on flowers, new plants and fresh paint.

—Inside, your house should look fresh, so make sure the paint, carpeting, light fixtures and appliances are updated and clean.

—De-clutter. Eliminate one-third to two-thirds of your stuff; hire a stager.

—Network. Sales come together because brains understand homes better than computers.

—Be patient. Statistics say that it takes 21 showings, not including open-house traffic, to sell a house.

Do You Know the Red Flags of Mortgage Fraud?

Mortgage fraud is not going away any time soon. The FBI has been working with bureaus of investigation in states that recently passed residential mortgage fraud acts to stay abreast of the latest fraud tactics.

The FBI has found that fraudsters are evolving new ways to take advantage of others and hide their intent. For this reason, anyone involved in the mortgage industry needs to be educated on the red flags of possible mortgage fraud, such as those outlined below:

Flipping vs. Serial Flipping:A fraudulent flip is one that erroneously increases the value of the property by using an inflated appraised value. If a property was purchased for $175,000 and soon thereafter was sold for $500,000, most professionals would notice. However, serial flipping is trickier. Say a house sold for $175,000, soon after sold for $250,000, then $325,000, then $400,000 and then $500,000. Fewer professionals would even raise an eyebrow. This scheme takes more time, but the end result is the same: fraud.

Multiple Contracts & HUD-1 Settlement StatementsIn this scheme, unbeknownst to the seller, the contract and settlement statement that is sent to lender shows inflated sales price. This enables the buyer to obtain a higher mortgage. In the end, the seller believes the property was sold for $300,000, but lender, agent and buyer believe the sales price was $500,000 (the amount on which the agent’s commission is calculated).

Fraudulent Qualification DocumentsIn this scenario, the borrower’s ability to qualify for a loan is misrepresented by fabricated employment history, income, credit records, and bank statement balances. FBI calls this is an “emerging issue” and a result of sophisticated Photoshop and editing software.

Bogus Assignment FeesBuyer #1 enters into an assignable contract with the seller at an inflated price. Buyer #1 locates Buyer #2 who may be a co-conspirator or a naïve investor. Buyer #2 takes an assignment of the contract at the inflated price and agrees to pay Buyer #1 an assignment fee. Inflated appraisal is used and Buyer #2’s application may contain misrepresentations.

Bogus Liens or InvoicesA buyer contracts with a seller at an inflated price. At closing, the difference between the true sales price and the inflated contract piece is paid to a bogus shell company of the buyer or individuals affiliated with the buyer.

ChunkingChunking transactions are similar to flipping, but instead of multiple sales of the same property, it involves multiple loans to the same borrower. In this situation, a borrower purchases more properties than underwriting guidelines would allow or obtains multiple refinance loans secured by the same property.

Chunking usually begins with an unsophisticated borrower attending a “how to get rich quick” seminar. At or following the seminar, a third party contacts the unsuspecting borrower to encourage investment in a specific property with no money down. The third party acts as an agent for the borrower and simultaneously submits loan applications on the borrower’s behalf to multiple financial institutions for the various properties. The borrower may not be aware of this.

The third party acts as agent for the borrower during the closing, and often, unbeknownst to the borrower, pockets the loan proceeds. The “unsophisticated” borrower is left with numerous loans from various financial institutions and usually has insufficient cash flow to repay the debt.

Builder BailoutsThese bailouts often occur when a builder is highly motivated to move inventory that has been sitting in a declining or depressed market. According to the FBI, condominium conversions are particularly vulnerable to this type of fraud.

In a builder bailout, the builder may use a variety of ways to quickly dispose of the property. Some of the methods are:

• Aiding in fraudulent borrower qualification.
• Offering excessive incentives not disclosed to the buyer’s lender.
• Offering no down payment by inflating the sales price by the buyer’s down payment and forgiving the buyer of that amount.
• Inflating the sales prices and using bogus liens or invoices.

Straw Borrowers
This type of fraud intentionally disguises the true beneficiary of the loan proceeds.
It may be used to:

• Conceal questionable transactions;
• Replace a legitimate borrower who may not qualify for the mortgage or intend to occupy the property
• Circumvent applicable lending limit regulations by applying for and receiving credit on behalf of a third party who may not qualify or want to be contractually obligated for the debt. The straw borrower may be a friend or relative of the true beneficiary, or merely a paid participant.

Mortgage Elimination
Mortgage elimination is an attack on an existing mortgage through forced cancellations and unusual cancellations (usually called a “declaration of avoidance”).

Purchase Disguised as Refinance
In this scenario, the buyer executes a contract for purchase and convinces seller to quitclaim the title to buyer prior to closing. This is done with or without a security deed from buyer to seller and is done without the payment of the sales price to seller. At this point, the buyer then applies for a refinance of the property instead of a property purchase.

Reverse Mortgage Fraud
The FBI calls reverse mortgage fraud an emerging type of scheme that takes years to identify. In this scenario, fraudsters identify foreclosed, distressed or abandoned properties and use straw buyers to commit occupancy fraud. Seniors are recruited to purchase the property from the straw buyers without the exchange of money. After living in the property for 60 days, the seniors obtain a reverse mortgage. A fraudulently inflated appraisal is used as justification, possibly based on repairs or renovations that may not have been performed. At this point, a lump sum disbursement of the equity is requested, which the fraudsters abscond with at closing. Unfortunately, this type of fraud usually is not discovered until after the death of the borrower.

Short Sales
Many argue that residential mortgage fraud cannot be involved in a short sale transaction. The misstatement, misrepresentation or omission of fact to the seller’s existing lender would not be in the mortgage loan process. Nevertheless, mortgage fraud is often involved! Not against the seller’s lender (although other crimes may be involved), but usually against the buyer’s lender. Sellers, agents, buyers, and others involved in the process find a way for the buyer to pay some money to the seller for the purchase of personal property or as rent for the buyer taking possession prior to closing.

The issue is whether the buyer made a misstatement, misrepresentation or omission of fact in the mortgage loan process for the new loan being obtained. If the buyer is paying $2,000 to the seller for personal property or rent that expenditure would have to appear on the Loan Application Form or itemized on the HUD-1 Settlement Statement. Otherwise, the buyer is misstating assets. The lender believes the buyer has $2,000 more in liquid assets than the buyer actually has. If the buyer became committed to pay $2,000 for a car or furniture prior to closing, this would have to be disclosed to the lender. That requirement is not changed merely because the payment is to the seller. Even if the seller has not committed residential mortgage fraud against the existing lender by receiving the undisclosed funds, the existing lender could refuse to accept the negotiated payoff.

Buyer brokers in particular, beware! How can a broker or agent avoid becoming involved in such fraudulent activity? Here is my advice:

• Closely evaluate the “chain of sales”
• Communicate with other agents involved in the most recent transactions
• Consider if the sales price is congruent with the sales and list price of other homes in the area
• Communicate with the loan officer…and your broker…if unsure
• Consider the buyer’s apparent ability to qualify for the purchase
• Avoid assignment fees payable to “original” buyers
• Avoid multiple transactions involving the same borrower in a short period of time
• Realize that any attempt to satisfy a mortgage without payment in full typically is NOT going to work. In a short sale, it might work, but ensure the lender has given written consent for the acceptance of a lesser amount…
• …and, be sure the conditions for the lender to accept a lesser amount are fulfilled

Howell Haunson

July 2010 Market Report

Monthly Highlights for Greater Albuquerque

• July saw a 14.06 percent decrease in pending sales and 24.22 percent decrease in closed sales, when compared to the previous year.

• The median sale price for single-family detached home sales rose in July to $186,000, up 0.54 percent from the prevous year and up 2.76 percent
from the previous month.

• Active listing inventory for single-family, detached homes is at 5,803, up 5.97 percent from the previous year.

 Read the full July 2010 Market Report 

How to Choose a Home

Finding the home that is right for you can be a time-consuming process. The experts at Move.com offer the following tips to help make sure you don’t just settle for a home, but instead find the home that is perfect for you. 

Once you've settled on a couple of neighborhoods where you would like to live, it's time to pick out a few homes to view. Your wish list can remind you which features are absolute requirements and which amenities you'd like to have if possible. When narrowing down your home search, consider:

-Types of homes
-Home purchase considerations
-Home comparison chart
-What to do when you’ve found the right home for you

Types of homes
In addition to single family homes (one home per lot), there are other forms of home ownership to consider as you begin looking for the next place you will call home:

-Multifamily homes: Some buyers, particularly first-timers, start with multiple family dwellings, so they'll have rental income to help with their costs. Many mortgage plans, including VA and FHA loans, can be used for buildings with up to four units, if the buyer intends to occupy one of them.
-Condominiums: With a condo, you own "from the plaster in" just as you would a single house. You also own a certain percentage of the "common elements"—staircases, sidewalks, roofs and the like. Monthly charges pay your share of taxes and insurance on those elements, as well as repairs and maintenance. A homeowners association administers the development.
-Co-ops: In a few cities, cooperative apartments are common. With those, you purchase shares in a corporation that owns the whole building, and you receive a lease to your own apartment. A board of directors supervises management. Monthly charges include your share of an overall mortgage on the building.

Home purchase considerations
Most buyers' first consideration, after neighborhoods are chosen, is the number of bedrooms. As you begin to view homes, keep the following purchase and resale considerations in mind:

-Weigh your needs, budget and personal tastes in deciding whether you want a home that’s a newly constructed, an older home or a home that requires some work—a ‘fixer-upper.’
-One-bedroom condos are more difficult to resell than two-bedroom condos.
-Two-bedroom/one-bath single houses generally have less appeal than houses with three or more bedrooms, and therefore less appreciation potential.
-Homes with ‘curb appeal,’ (a well-maintained, attractive and charming view-from-the-street appearance) are the easiest to resell.
-When resale is a possibility, don't buy the most expensive house on the street, or anything that is unusual or unique. The best investment potential is traditionally found in a less expensive, more moderately sized home on the street.

Home comparison chart
While house-hunting, it's a good idea to make notes about what you see because viewing several houses at a time can be confusing. Create a comparison chart before you begin looking at homes so you can keep track of your search, organize your thoughts and record your impressions.

When you’ve found the right home
Before you begin the home buying process, resolve to act promptly when you find the right house. Every Realtor has stories to tell about a couple who looked far and wide for their dream home, finally found it, and then revealed that "we always promised my Dad we'd sleep on it, so we'll make an offer tomorrow." Many times the story has a sad ending—someone else came in that evening with an offer that was accepted.

Resolve at this point that you will act decisively when you find the house that’s clearly right for you. This is particularly important after a long search or if the house is newly listed and/or under-priced.


By Paige Tepping
RISMEDIA

Changes to Mortgage Underwriting May Affect Many Buyers

The real estate industry and especially the mortgage industry have been overwhelmed with changes, regulations and consolidations recently. In the last couple of months, many transactions nationally have experienced delayed closings or worse as a result of the application of new guidelines affecting APR, Good Faith Estimates (GFE), Truth in Lending (TILA) and condo project approvals to name a few.

There is one more issue that is critical for real estate agents, loan officers, and anyone else who deals with consumers purchasing a home or obtaining a refinance. Effective with applications on or after June 1, 2010, Fannie Mae has issued new lender mandates (FNMA LL-2010-03 Loan Quality Initiative) on a national basis that, if not understood properly, could have devastating consequences for many buyers and sellers. We want to be certain that everyone understands the implications of the new rules and ensure that all interested parties know what they need to know to minimize negative repercussions.

The intent of this initiative is to assure that all applicant information is disclosed and is honest and accurate as of the moment of closing. Lenders will now be required to re-pull credit report information just prior to closing, re-verify employment, validate Social Security numbers, verify intent to occupy and verify that all parties to the transaction have been checked against the national “excluded party” list, which is managed by HUD and by the General Services Administration. Changes in any of these factors are likely to result in a re-underwrite, the need for additional documentation, or suspension of loan closing.

The most onerous of these is the credit re-pull. It is important that this is done as a “soft pull” so it does not show as an inquiry, which could potentially change the borrower’s credit score. Firms will, however, have to match the outstanding debts and inquiries with the report used to approve the loan. Additional credit or increased balances that change the debt-to-income ratio more than 2% (or less if it now exceeds guidelines) will require the loan to be suspended and re-submitted to underwriting.

Any additional delinquencies will result in a new, full credit re-pull and re-underwriting, utilizing the new credit. Any and all inquiries from other lenders or credit suppliers must be verified by the credit bureau and certified that new debt did not occur. If new credit has been extended, the new debt must be included in the borrower’s debt-to-income ratio and the loan must be re-underwritten.

Other considerations are W-2 employees that may own more than 25% of a business, mandating business returns and cash flow analysis and full disclosure of child support and alimony. Changes could render the applicant unqualified or could delay the closing. As a result of TILA, GFE and risk-based pricing changes, additional debt could result in re-pricing the loan due to a change in credit score, which even if approvable, would delay the closing three business days as re-disclosure would be required.

So How Do We Manage the New Process?
Real estate agents and lenders must impress upon the applicants the need for full and honest disclosure at the time of application, during the loan process and at closing. Buyers must be cautioned against applying for new credit during the process, changing jobs (30-day pay stub requirements are being enforced), and charging to their credit cards. It is imperative that they notify the lender if anything changes from application to closing.

We must all be aware that an applicant that signs an erroneous initial or final closing application could be committing fraud. Lenders choosing to approve loans without the proper loan quality processes and documentation are only endangering the buyer. Any lender or real estate agent that encourages someone to falsify information could be equally responsible. It is noteworthy to mention that many loans go through an immediate quality control audit post closing, so this could affect highly qualified applicants as well. Identified fraud of this nature could be investigated by the FBI.

While this new policy was implemented first by Fannie Mae, it is already a mandate of all national lenders and, based on experience, will soon be required on every loan. It is important to keep this in mind on every deal, not just ones that may involve Fannie Mae.

By Jim Dinkel and Ken Trepeta

Top 10 Metros With Predicted Price Climbs

Housing prices are about to turn around, predicts financial services technology firm Fiserv.

David Stiff, chief economist at Fiserv, says home prices will fall 32.9 percent from 2006 through early next year. But by early 2014, he believes they will climb an average of 7.2 percent from 2010 levels, with some areas skyrocketing.

Fiserv believes these 10 metropolitan areas will see the most growth in the next four years.

1. Washington State: Bremerton-Silverdale, +44.7 percent
2. Oregon: Bend, +33.6 percent
3. Michigan: Detroit-Livonia-Dearborn, +33.1 percent
4. California: Napa Valley, +31.7 percent
5. Nevada: Carson City, +31.6 percent
6. Florida: Panama City-Lynn Haven-Panama City Beach, +26.9 percent
7. Arizona: Flagstaff, +26 percent
8. New Mexico: Sante Fe, +25.8 percent
9. Wyoming: Cheyenne, +23.7 percent
10. Alaska: Anchorage, +20 percent

Source: Bloomberg BusinessWeek