What is Arbitration and How Does it Work?

In essentially every real estate transaction, buyers, sellers, and their respective REALTORs must decide whether to accept or decline arbitration.  My experience is that most agents have no idea what they are asking their clients to accept or decline, and that's a big issue.  In the event a discrepancy or dispute arises between buyers and sellers, whether during or after the transaction, that decision to accept or decline arbitration will have a huge effect on what happens next.

To start, a 35,000 foot overview of arbitration - arbitration is an alternative to litigation (i.e. lawyers and the court system).  A panel of arbiters would hear both sides of a case, and the decision reached by the arbiter becomes legally binding.  It is significantly cheaper than going through the court system (after all, hiring lawyers is expensive).  In Minnesota, arbitration has a statute of limitations of two years (meaning a claim would have to be filed within two years of the closing date - anything after would likely be rejected by the arbitration company).

The important caveat to keep in mind is that a dispute is only going through the arbitration process if ALL PARTIES TO THE TRANSACTION (include the REALTORs) accept arbitration.  If any party declines on the Arbitration Disclosure Statement, any dispute would be directed to the small claims court system.  This is why it's important for customers to understand the significance of their decision to either accept or decline arbitration at the time of the offer.  At the end of the day, REALTORs are not allowed to dispense any sort of legal advice, but at the very least they should be able to communicate and articulate the consequences for accepting or declining arbitration.

Please keep in mind that this is a very high-level overview of arbitration and what it entails, and I could probably write another 5 paragraphs about this.  If you have other questions about arbitration and how it relates to real estate transactions, please feel free to contact me.  And of course, always seek the legal advice of a qualified attorney if you have specific questions!

Buying a House? Test for Radon!

Continuous radon monitor test in-progress.

Over the past few years, particularly since a section was added to our Seller's Property Disclosure Statement, radon has been a hot button issue in real estate.  To quickly recap, radon is an odorless, invisible gas that is caused by the half-life breakdown of uranium in soil.  It's in every house and is the 2nd leading cause of lung cancer behind smoking, according to the Environmental Protection Agency (EPA).  Radon levels are measured in picocuries per liter (pCi/L), and the EPA states that any level above 4.0 pCi/L is deemed to be "unsafe".

Radon testing is involved in nearly EVERY home transaction these days.  Testing occurs during the buyer's home inspection contingency period, and typically costs about $150.  Testing is typically done using a continuous monitoring system and is performed in the lowest level space that will be lived in (my home inspection usually performs them in a lower level bedroom).  The minimum amount of time for testing is 48 hours and the results are ordinarily available immediately.

I strongly encourage buyers to test for radon during their inspection contingency period.  If the results come back below 4.0 pCi/L, excellent!  You can rest assured that your home has a safe level of radon without installing a radon mitigation system.  If it comes back above 4.0 pCi/L, it's usually an item that it easily negotiated with the sellers.  The most common solution is for the seller(s) to hire a professional contractor to install a radon mitigation system.  Radon mitigation systems vary in price depending on the home size and setup, but a typicaly system costs somewhere in the $1,200 - $1,800 range.  Below is a very basic graphic example of how a radon mitigation system looks.

Example of a radon mitigation system.

If the seller is unwilling to install a system prior to closing, the alternative solution is usually for the seller to offer a price reduction or closing cost credit to cover the cost of the system.  Sellers have a strong incentive to resolve a high-radon issue, because they would then be required to disclose that (1) a test was performed and it came back high, and (2) that a radon mitigation system has not been installed.

Radon is a complicated issue that effects nearly every single transaction these days, so if you have additional questions on radon or radon mitigation systems, contact me!  I'd be happy to help.

Make Sure Your REALTOR Understands the Paperwork!

(PREFACE:  Now that the busy season is drawing to an end, expect more blog posts this fall and winter!  I realize it's been several months since I last posted here.)

I almost feel stupid writing this blog post because of how obvious this topic should be, but all too often (and particularly as of late) I've seen my fellow REALTORs show a complete lack of understanding about the paperwork we use in transactions.  At the end of the day, these REALTORs are ultimately doing a strong disservice to their clients, who rely and trust on them to navigate through the paperwork.  No buyer or seller should be expected to know more about the paperwork than their REALTOR.

I think part of why this is popping up (and subsequently why I felt compelled to write this) is that the Minnesota Association of REALTORs recently made changes to many of our forms.  This is pretty standard - about once a year, the Association with make minor tweaks to the forms.  Usually they are minimal - a couple word changes here, and small new section there.

However, this year the Association made some rather sweeping changes - in particular, they made very significant changes to the Inspection Addendum, which is a form used in almost every single transaction.  More specifically, the way that the number of days are calculated for completing inspections and negotiating any repairs or price reductions changed.  These timelines have significant importance to the transaction, and making a mistake could end up costing the buyer the house, or causing the buyer to assume a bunch of sub-par items on the home inspection.

At the end of the day, real estate isn't rocket science.  But there are huge amounts of money on the line for buyers AND sellers, and even the smallest mistakes can have significant repercussions.  REALTORs should know the paperwork inside and out, be diligent and detailed, and if they can't explain the paperwork or how specific aspects of the transactions work it should be an immediate red-flag.

Why You Should Meet With Your REALTOR Before House Hunting

It happens ALL the time:  I get a call from a new buyer client, and they've found a house online and they want to go see it immediately.  I completely understand why - they've found something exciting, and it's piqued their interest enough to start house hunting seriously.  However, I always try to get my clients to pump the brakes and hold off on house hunting until I have a chance to sit down with them. 

In my opinion, particularly if it's your first home purchase ever, it is absolutely critical to meet with me so we can discuss the process, some of the issues we might encounter, and set some ground rules/expectations for the home buying process.  Buying a home is a huge investment, and it's crucial to know what you are walking into instead of just "winging it".  As a REALTOR, it is very hard to guide the process and educate my clients when we are out looking at houses - it just never seems to work out like it should.

Most of my initial appointments are 75-90 minutes, and we cover a lot of ground.  We talk about the reasons buying a home is a good investment, what the current status of the housing market is, what the step-by-stop process is that you'll encounter, a little bit about mortgages, a timeline of when you will be expected to spend your money during the process, and a bit about my experience/real estate background.  Many loan officers do something similar to this - in the homebuying process, knowledge is power!

Tips for Selling Your Home in Early 2016

As 2015 winds to a close, many homeowners are making plans to sell their home in early 2016.  Whether that means January or May makes a huge difference - after all, January is a bleak and dismal time of year in Minnesota!

Here are a couple of helpful hints if you are planning on selling in 2016 - these are things you can be doing RIGHT NOW to make your life less stressful when it comes time to actually put your home on the market.

• Get those outdoor projects done this fall.  Fall is a great time for exterior projects, such as painting.  Just don't wait too long - if you are painting in November, there is a good chance that paint will no longer be there come springtime.  This will also free you up to work on any interior projects when it's -10 F outside.
• Take exterior photos in the fall.  While the grass is still green and flowers are still in bloom, take your photos now!  Wintertime photos tend to be dull as all you can see is the home and LOTS AND LOTS of snow.
• Get a list of interior projects ready.  When the snow hits, doing any exterior work is going to be nearly impossible.  Get a list of interior projects put together so you have a game plan and are ready to hit the ground running.
• Get your pricing right.  Work with your REALTOR to make sure you will be appropriately priced for your neighborhood and that any projects you plan on doing are worthwhile from an investment standpoint.

This list is far from all-encompassing, but should give you a place to start as you prepare to list your home.  And of course, if you plan on listing while there is still snow on the ground, make sure to keep that front stoop/sidewalk shoveled and full of salt!

How Much Earnest Money Should I Offer?

This is a really common question I'm asked - "How much earnest money should we include with our offer?". Since I hear this often, I figured it'd be a great subject for a blog post!

Like (essentially) everything in the Purchase Agreement, the amount of earnest money is negotiable!  However, REALTORs frequently use a rule of thumb for earnest money - roughly 1% of the purchase price.  For example, if the home you are offering on is priced at $280,000, I normally instruct my clients that something in the $2,500 - $3,000 range is an acceptable amount of earnest money.

There are some important caveats to this rule of thumb, however.  For example, when offering on a foreclosed home the seller may require a certain amount.  I've seen foreclosures require 2% of the purchase price for earnest money - in the $280,000 example above, the bank would require $5,600 for earnest money.

Another caveat is that in a multiple offer situation, raising the earnest money might make your offer look stronger than the other competing offers.  Of course sellers ultimately care the most about the sales price over the rest of the details, but it's a simple way to increase the strength of an offer!

Josh's 2012 Real Estate Predictions

Nothing is more enjoyable than wildly speculating about what the future holds.  Of course, there is no way to predict with any certainty, but I think there are some underlying trends that will continue into 2012.  So without further ado, here are my 2012 Real Estate Predictions:

1.  Interest rates will remain at historic lows.
This one seems like a slam-dunk, of sorts.  The Federal Reserve has already pledged to keep interest rates at their current level through the end of 2012, and interest rates have fallen about one percent over the past year.  To the left is a chart that depicts Freddie Mac mortgage rates over the past 40 years.  This should provide perspective on just how low current rates are.  However, buyers should not get complacent - interest rates will not stay where they are forever.

2.  Market inventory will continue to fall.
Over the last year, we have seem a dramatic decrease in the amount of homes coming on the market.  In fact, inventory has fallen roughly 30% in just the last year.  Of course, it has fallen 30% from historically high levels and the market still has room to balance out.  My prediction is that we will continue to see the amount of inventory fall, which leads beautifully into my next prediction!

3.  Prices will be flat or slightly higher.
With declining inventory and low interest rates, it is simply a matter of time before we start to see small price increases.  I've actually been predicting price increases on this blog for the last few months, and conditions seem prime for it to happen.  Expect hesitant buyers to start pulling the trigger once news stories begin talking about prices increasing.

4.  Foreclosure rates will fall in 2012.
There are still a considerably high amount of distressed properties on the market, but I suspect the total number will be quite a bit less than in 2011.  Unemployment numbers have continually improved, and the market has already been in full-blown liquidation for the last three years.  Expect the balancing between traditional and distressed listings  to continue in the next year.

Now, let's be clear:  these are fairly innocuous and conservative predictions.  The market will continue to improve this year, just as it did last year and the year before.  We are still not out of the woods yet.  But expect a more vibrant real estate market in 2012 than we saw in 2011. 

Happy 2012 to all my blog followers, and as always, if you have any real estate questions please do not hesitate to contact me!

What Happens to Housing if the Debt Ceiling Isn't Raised?

I don't like to get political on this blog - I have my own opinions, others have their own as well, and I don't find it particularly useful to the goal of this blog, which is to present informative information to readers interested in the housing market, housing policy, and (to a lesser extent) mortgage lending.

But with all the hullabaloo in Washington DC surrounding the debt ceiling, I think it is useful to explore what might happen to the housing and lending market if the debt ceiling isn't raised.  As of this post, there are about five days remaining before America exhausts it's ability to borrow money and continue to meet it's already-appropriated obligations.

1.  Interest rates will surely rise.  If investors view the US economy as a riskier investment, they will expect higher yields for their money.  This scenario could very likely lead to an increase in mortgage rates as well.  An increase of just one percentage point on a mortgage will decrease the amount of money buyer's can borrow.  It will possibly price some buyers out of the market, which will exacerbate an already weak housing market.

2.  The small gains we have seen recently in new construction could be erased.  When the housing market burst in 2006/2007, new construction plummeted as well.  We have seen recent upticks in the number of new housing starts, and failure to raise the debt ceiling will likely cause developers to postpone new projects as they find financing harder and more expensive to come by.  This also puts construction workers out of a job, just when they need the jobs the most.

3.  Home prices could very likely fall.  We have seen a dramatic stabilization in home prices in the last two years, but if buyer's are unable to borrow as much as they previously were, fewer buyers will be in the market to purchase existing homes.  The laws of supply and demand tell us that if demand falls, so too will prices.

This is just the beginning of what could happen.  The housing market is fragile as it is, and an American default could very easily send the housing market back into the very doldrums it is trying to recover from.  By no means do I mean to fear-monger or frighten my readers, but the reality is that an American default has never happened before, and as a result it is difficult to predict what the fallout from such a scenario might be. 

Either way, the best we can hope for is for our elected officials to cease the current game of chicken and find some common ground - if only for the American people's sake. 

Foreclosure Filings Continue to Drop, But...

According to RealtyTrac, a real estate research company, foreclosure filings fell in Minnesota again, falling 14% compared to the same period last year.  This should come as welcome news as distressed properties have put significant downward pressure on the housing market over the past 4 years.

But there is a caveat with this seemingly welcome news:  Have foreclosures slowed because of structural improvements (improved economy, wage increases, principal write-downs, etc..), or have they slowed for some other reason(s)? 

It is increasingly looking like the latter is the case.  Most experts and analysts believe the precipitous drop to be the result of delayed processing and procedural changes in light of last year's robo-signing scandal.

The big picture here is that while some homeowners are benefiting by living rent-free for an extended period of time, we are far from out of the woods.  As I have previously described on this blog, there is a large inventory of "shadow foreclosures" - meaning homes that actually have been through the foreclosure process already, but banks are being slow and cautious in bringing them to market.  We also could see an uptick in foreclosure filings at any moment if the experts and analysts are correct in assuming that the drop was attributable to procedural/process-related events. 

Foreclosure Notices Drop Sharply

Via Peter King at MorgageLoans.com:

Foreclosures tumbled in April, with the number of homeowners receiving initial notices of default down by 25 percent from their March level.  New figures from the HOPE NOW Alliance indicate there were 163,000 foreclosure starts in April, down from 217,000 the month before.

This is good news for the overall health of the housing market, but I wouldn't read too far into these seemingly positive figures.  There is skepticism that banks have been processing foreclosures at a slower rate in light of the "robo-signing" scandal, and that they will pick up the pace once they settle with the Department of Housing and Urban Development (HUD).  Also, although the number of foreclosure notices is down, the data indicates that the number of mortgage delinquencies has remained steady, with 2.66 home loans at least 60 days past due. 

Why Short Sales Need Attorneys

Our guest blogger is Jerry Probst, owner and attorney at J. Probst Law in Burnsville.  Jerry and his team specialize in short sales, foreclosure avoidance, and creditor/debtor law.  You can learn more about J. Probst Law here.

If your real estate agent truly has your best interests in mind when advising you about the possibility of short selling your home, they will definitely tell you to speak to an attorney. And not just any attorney, but one knowledgeable in short sales, foreclosures and creditor/debtor law. This will ensure that the sale would be the best choice for you. It is important for you to understand all of your options and the subsequent ramifications.

There is only one common denominator with all short sales - that is, the property is worth less than the amount that is owed. Other than that, a multitude of factors need to be addressed which differ for each individual or family. Some of those issues include how many mortgages are against the property and if they are current or not, whether there are tax liens or judgments, the nature of your hardship, your overall financial situation, what your future plans are, as well as your expectations about the process. Inevitably, other issues unique to your situation will come up that will need to be addressed.

It is only after you and the attorney have discussed these issues, and you understand the options you have and their possible ramifications, that you can make a knowledgeable decision on how to proceed.

If you decide on a short sale you will list the property with the agent.  If you decide a short sale is not a viable option at this time, you will remember the agent had your best interests in mind and will refer business to them and use them in the future!

Green Remodeling

There are a number of reasons people overlook the possibility of being more "green" in their remodeling projects.  Some people simply can't afford the extra costs associated with green projects - the conventional wisdom is that by spending a little more now, you can actually save money over time.  Some people wrangle over the decision of whether to embark on larger projects or simply focus on smaller remodeling projects.  And some people simply don't worry about the amount of carbon dioxide we pump into the atmosphere.

But for those of you interested in looking for greener ways to remodel, whether it be a small fix-up job or a major addition/rebuild, I have just the book for you.

"Practical Green Remodeling" by Barry Katz is an excellent resource for finding ways to become more energy-efficient with your home.  Barry stresses that the book isn't a "how-to" but more of a "what-to" - giving readers multiple options to explore how green they want to be or can afford to be.  Below you will find an Amazon link to the book if you are interested in checking it out!

Happy Holidays!


Practical Green Remodeling by Barry Katz

Drowning

One of the serious problems facing the housing market in America is the concept of "underwater" homeowners.  Essentially, an underwater homeowner owes more on their house (i.e. their mortgage amount) than they could sell the house for (their market value).  With housing prices down 40-50% in many areas, it is easy to see how this is a problem.  For example, Jim (completely fictional) bought his house in 2007, just before housing prices fell.  He paid $500,000 for it and took out a $400,000 loan (20% conventional loan).  However, just a few years later, his house is only worth $250,000 on the market and he still owes $375,000.  In essence, Jim is $125,000 "underwater."  The only way for Jim to move would be to negotiate with his bank to either forgive the difference, or set up an arrangement where Jim would pay off the $125,000.  It doesn't take an Ivy League-educated mathematician to see that the math just doesn't add up.

The reason I bring this scenario up is because of a new report released by CoreLogic, an information and analytics firm that studies the real estate market.  According to their numbers, some 11 million households are "underwater," essentially trapped in their home for years to come.  This number works out to about 22.5% of ALL mortgaged homes.

According to CoreLogic, during an average or better real estate market, only about 5% of mortgage homes are underwater.  This creates a certain fluidity in the market and gives almost every homeowner the chance to move on if they so desire.  But in today's market, this just simply isn't the case, and the prospects for getting out of this situation don't look strong, at least in the short-term. 

The Sacred Cow of Real Estate

With the nation's finances in dire shape, elected officials will have to make tough choices in the coming years.  Federal spending is at its second highest nominal dollar amount (2009 being the highest) in the face of two wars and the "Great Recession," tax revenues have plummeted as a result of massive tax cuts and a sluggish economy, and the gap between the two continues to escalate.

These are the kind of tough choices that make politicians wince.  But unfortunately, we've got into this mess and something needs to be done to get out of it.

Numerous deficit-reduction proposals have begun emerging and the Mortgage Interest Tax Deduction, long-held as the "sacred cow" of real estate investing, is increasingly coming under the chopping block.  With home ownership a central theme to the American dream, I felt it would be a good idea to investigate these potential changes and how they might affect homeowners. 

First, it is important to note that of all the advanced economies in the world, only 4 allow personal debt interest to be deducted from their taxable income.  These countries are:

1)  The United States
2)  Sweden
3)  Switzerland
4)  The Netherlands

Perhaps homeowners in the United States have taken for granted their ability to write off mortgage interest.  As you can see, very few countries have laws that allow such a practice.

There are some important rules that govern that ability of homeowners to write-off mortgage interest.  First, mortgage interest deductions are only allowed on primary and second-homes.  Investment properties are not often allowed the deduction.  Also, only the interest paid on the first $1 million of debt is permitted.  These might seem like strict rules, but the reality is that very few Americans own multiple homes, and even fewer have over $1 million in mortgage-related debt.

Currently, the mortgage interest deduction is one of the largest subsidies operated by the federal government.  On average, the federal government spends about $100 billion annually to continue the subsidy.  But does it that important?  Does the mortgage interest deduction really improve the level of homeownership in the United States?

Politically, yes, it does.  Defending the mortgage interest deduction has become commonplace for legislators.  Can you imagine what the FOX News' and the MSNBC's of the world would have to say about a politician that "supports taking more money away from you"?  Of course not, because legislators from both parties have been more than reluctant to call for anything other than a continuation of the status quo.

The real question becomes, who does the mortgage interest deduction benefit most and is it achieving its stated goal of preserving and increasing the level of American homeownership?

Although politicians say one thing, economists (you know, the ones who actually analyze the data and attempt to give unbiased, logic-based conclusions/recommendations!) are almost united in their opposition to the full subsidy.  As it turns out the data shows that, although the interest deduction appears to be a good deal for everybody, the winners are those at the very top of the income distribution.  And those at the bottom rungs of income?  They see the least of the benefits.  In fact, in some areas with particularly strong land-use regulations (think urban areas) the mortgage interest deduction actually HURTS homeownership, particularly among lower-income individuals.

So what should be done?  It seems both legislatively unfeasible and economically irresponsible to do away with the entire deduction.  It has become a way of life for Americans and a major disruption would undoubtedly do more harm than good.  I think an effective compromise would be to roll back some of the subsides for the highest-earners (those that need the deduction least) and use the saved revenues to encourage broader home-ownership for lower-income levels.  These incentives could be something similar to the $8,000 First Time Home Buyer's tax credit of 2008/2009, or they could be in the form of down-payment assistance.  Regardless of the form the incentives take, a well-targeted program would benefit those at the bottom and would start to bring the housing market back to rosier days.