An Unwary Buyer Could Be Blindsided at Closing and Lose Earnest Money

[Published Feb. 28, 2013, in the Denver Post and 5 Jeffco weeklies - except for final 5 paragraphs]

By JIM SMITH, Realtor®

There is a little-noticed provision written into the state-approved real estate contract to buy and sell real estate that could blindside a buyer and cause him or her to lose their earnest money and not get the house they think they’re about to purchase.

I’m referring to Section 4.4.2 of the Contract to Buy & Sell, which reads as follows: “All funds required to be paid at Closing or as otherwise agreed in writing between the parties shall be timely paid to allow disbursement by Closing Company at Closing OR SUCH PARTY SHALL BE IN DEFAULT.”  [caps in original]

Although I’ve never seen it happen, that section of the standard contract allows a seller to declare a buyer in default if all funds have not arrived at the time of closing.  With default thus established, the seller gets to keep the buyer’s earnest money and then proceed with a back-up contract.

This has not been a big fear in the past, but now that we’re seeing multiple offers on listings, it could very well happen.  (Let me know if you've seen this happen!)

How does a buyer’s agent prevent this disaster from happening? It’s pretty simple — write into the contract that the time and place of closing is set by the buyer’s agent, not the seller’s agent, and not by “mutual agreement.”  This would allow the buyer’s agent to announce that the closing is postponed and keep postponing it as late as midnight that day.  (Only the day of closing is specified in the contract.) If the contract lets the listing agent set the time and place of closing, then make sure all funds are wired the day before a morning closing.

Last fall I represented a buyer in the purchase of a home where the seller tried every trick in the book to terminate the contract. The best of those tricks was to cloud title to the property so that my buyer’s lender wouldn’t fund the closing.

 

The title company refused to issue a title commitment because of the cloud on title, but I was able to convince them to schedule the closing anyway so that the buyer could prove readiness to close.  (It was the refusal to issue a title commitment that was the specific reason the lender wouldn't underwrite a loan and wire funds.)

 

I knew that if my buyer couldn't have sufficient funds in the closing company's hands at the time of closing, the listing agent could show up, declare my client in default, demand forfeiture of $5,000 earnest money and terminate the contract.  Since the lender wouldn't send the funds, I convinced my Buyer to withdraw sufficient funds from her IRA and wire them to the title company in time for closing.  (Without this ability to produce cash at closing, we would have been forced to accept termination, hopefully in return for release of the earnest money.)

 

The buyer and I showed up for the closing and, in the absence of the seller and listing agent, we were able to declare the seller in default and demand specific performance.  Within a few weeks, the seller relented, removed the cloud on title, and agreed to a closing.  The seller realized -- and we knew she would -- that if she had not relented, the buyer would have prevailed in court and not only forced the sale, but the seller could have been required to pay for the buyer's legal costs and even damages.  By relenting, the seller only had to pay her own legal costs. 

 

My buyer's lender processed the loan and got the funds to the title company in time, and the title company wired the IRA funds back to the IRA account.  Best of all, since the funds were gone for less than 60 days, there was no penalty on the funds' withdrawal. 

 

PS: This scenario was only possible because I fully understood critical aspects of the contract to buy and sell real estate. (I also had a good real estate lawyer to advise and represent my buyer.)  If, instead of hiring me, my buyer had dealt directly with the listing agent or had an agent of her own without such knowledge, this story might not have had the happy ending it did for her. 

 

Just Listed: Highly Upgraded Home in Golden's Village at Mountain Ridge

[Published Feb. 21, 2013, in the Denver Post and in five Jefferson County weekly newspapers]

 

330 Washington Street, Golden

 

The outstanding curb appeal is more than matched by interior upgrades in this 4-bedroom, 4-bath home — the all-Viking kitchen, hardwood floors throughout (even the stairs), included home theater equipment, high-end Hot Spring hot tub, great views—the list of features is unending. $495,000.

 

Open Sat., Feb. 23, 1-4 pm and Sun., Feb. 24, 2-5 pm

 

 



Hiwan Hills Home Just Listed

[Published Feb. 21, 2013, in the Denver Post and in five Jefferson County weekly newspapers]

 

28966 Clover Lane, Evergreen CO 80439

 

Situated on a wooded acre with priceless mountain views to the west, this 3-bedroom, 3-bath custom-built mountain contemporary home is a gem in a private, peaceful setting. Entertain or quietly observe the wonders of nature from two decks. Two moss rock fireplaces add atmosphere to the large living and family rooms. The master suite occupies the entire top floor.  Two guest bedrooms share their own living space on the lower level. You will love the great room & gourmet eat-in kitchen!  $525,000.

 

Open Sat., Feb. 23, 1-4 pm and Sun., Feb. 24, 2-5 pm.

 



This Seller’s Market Inspires Greater Use of Escalation Clauses in Contracts

[Published Feb. 21, 2013, in the Denver Post and in five Jefferson County weekly newspapers]

I have utilized escalation clauses for years when representing buyers in multiple-offer situations.  For the most part, my colleagues competing for the same listings were unaware of this tool, but this week I’m going to share this increasingly utilized tool with them and you, while educating my readers about how escalation clauses work.

An escalation clause (inserted under “additional provisions”) says that, in the event there’s a higher priced offer from another buyer, this buyer will pay “x” dollars more than said offer, up to a limit of “x” dollars.  Sometimes, no limit is given.

You know you’re competing with other buyers when the listing agent tells you (or your agent) to submit your “highest and best” offer.

An escalation clause can help you get that coveted listing, although it typically is not accepted in the case of foreclosures. I’ve used an escalation clause successfully in less competitive situations, but it’s getting trickier now that more offers are being submitted and more agents are using the same clause. 

There are a few things to keep in mind when using this tool.  First and foremost, the seller doesn't have to play along.  He/she can choose to counter any of the other offers and, if he/she counters your offer, the seller can ignore your demand to provide evidence of the competing offer you are besting.  So there!

 

I never include a cap, because that reveals how high my buyer is willing to bid. If the buyer worries that the counter will be too high, I remind him that he doesn’t have to accept the counter, and even if he did, he could terminate under the inspection objection (or other) provision of the contract.

Sprawling Ranch on 1/2 Acre Has Great Upgrades

[Published Feb. 14, 2013, in the Denver Post and in five Jefferson County weekly newspapers]

16603 W. 56th Drive, Golden 80401

 

Just east of North Table Mountain is a hard-to-find subdivision of high-end homes called Table Mountain Meadows. This 4-bedroom, 4-bath home epitomizes the custom-built home with all the most popular upgrades. Slab granite, hardwood, stainless steel appliances, stamped concrete, epoxy garage floors, jetted tub, plumbed gas BBQ, 9’ and vaulted ceilings, dance floor, fitness center (equipment included!), huge cedar closet, skylights, high-end window coverings, crown moldings, roll-outs and 42” cabinets — the list of upgrades is unending! Open this Saturday, Feb. 16th, 2-5 p.m. 

 

Take a narrated video tour of this listing at http://www.TableMountainMeadows.com.

 



Buyers Learn How to Avoid Disclosing Inspection Issues to Lenders

[Published Feb. 14, 2013, in the Denver Post and in five Jefferson County weekly newspapers]

Effective this year, buyers are required to submit any inspection resolution to their lender, which has the potential of raising red flags with mortgage underwriters.

Let’s say, for example, that mold was discovered during inspection and the buyer demands mitigation. Seller offers to resolve the issue by providing a monetary concession equal to the cost of mitigation. But mold is a huge red flag for lenders. The solution: Buyer withdraws his inspection objection and the parties sign an amend/extend for a concession equal to the mitigation cost. But might this approach not subject the buyer (and agent) to a charge of mortgage fraud?

It’s Almost Scary How Buyers Are Bidding Up Properties Above Listing Price

[Published Feb. 14, 2013, in the Denver Post and in five Jefferson County weekly newspapers]

This week I got a taste of how hot this seller’s market is getting. I showed a home which had so much deferred maintenance that even the exterior trim was rotting, yet it attracted four competing offers, two of them over the listing price, which the listing agent himself agreed was not justified by comps.  He explained that the bankruptcy trustee handling the sale had observed the overbidding of new listings and wanted to try the higher listing price.

Meanwhile, another agent called me because she is about to list a foreclosure that I had listed for $290,000 several years ago, before foreclosure — and it didn’t sell then. Now the home was in even worse shape, and the agent wanted my advice on what price to list it at.  I had to say that it would probably sell easily for $290,000 now, despite its much worse condition.

The agent, who specializes in bank-owned properties told me that Fannie Mae is now routinely listing their foreclosures at $30,000 over the prices recommended by the brokers it hires to give BPO’s (broker price opinions).  They, too, are sensing this seller's market.

Apparently, appraisers are going along with these greatly increased valuations, but double-digit price increases can, over time, create a housing bubble that will only burst later on. Slower appreciation is much better for a market.

Like other showing agents, I’m warning buyers that homes are “flying off the shelves,” going under contract with multiple offers as soon as they’re put on the market. The statistics support that statement. Of those current listings on the market 10 days or less, 23% are already under contract. Of those put on the MLS less than a month ago, 39% are under contract — and 137 of those have already closed (mostly for cash), 52 of them at full price, and 26 of them above their listing price.  [Statistics gathered on Monday, Feb. 11th.]

This Week's Featured New Listing: Friendly Hills Home With View of Foothills

[Published Feb. 7, 2013, in the Denver Post and in five Jeffco weekly newspapers]

 

4674 S. Devinney Court, Morrison

Imagine home ownership in this desirable location just a short drive to Red Rocks, other parks and golf courses! This split-level home with 3 bedrooms and 2 baths has a finished basement with a bonus room suitable for an office or hobby room. The new interior paint is almost dry and brand new carpet is in the bedrooms and family room.  Hardwood floors grace the kitchen and dining/living room area, and both baths are tiled.  The deck is being stained in the backyard, which includes a dog run and storage shed.  This comfortable home is located in a quiet neighborhood, yet convenient to C-470 and I-70.  Be one of the first to check it out as it is being held open from noon to 3:00 this Saturday. Feb. 9, 2013!  Listed this week at $240,000.

Fees on FHA-Insured Loans Are Rising, Hurting First-Time Buyers the Most

[Published Feb. 7, 2013, in the Denver Post and in five Jeffco weekly newspapers]

There is often confusion about the role of FHA (Federal Housing Administration, a division of the Department of Housing and Urban Development) in financing home purchases.  FHA does not lend money; they insure a mortgage against the possible default of the borrower.  When an FHA-insured loan goes into foreclosure, HUD reimburses the lender and takes ownership of the property, which then becomes a “HUD home” and is sold by HUD to a new buyer.

So, where does the money come from to satisfy the lender’s claim?  The money comes from the Mutual Mortgage Insurance Fund (MMIF).  The MMIF is funded by two forms of the Mortgage Insurance Premium (MIP), one paid by the borrower at closing (the “Upfront MIP”, currently 1.75% and financed into the loan), and the second on a continuing basis through the renewal MIP, which is divided by twelve and added to the borrower’s monthly payment, just like homeowner’s insurance or property taxes.  Because of the huge losses suffered by the MMIF as a result of the flood of foreclosures in recent years, FHA has raised its MIP several times.  At the beginning of the crisis, borrowers paid 1.0% in upfront MIP and paid 0.55% in renewal MIP. In the case of 15-year loans, the annual MIP was eliminated once the principal loan amount fell to 78% loan-to-value.

Since then, the upfront MIP has nearly doubled to 1.75%, and the renewal MIP has more than doubled to the present level of 1.25%  Effective with FHA case numbers issued on or after June 3, 2013, the renewal MIP will rise to 1.35%. In addition, the MIP on 15-year loans will no longer be eliminated when the borrower achieves 22% equity.  In other words, even when you owe 5% of what your home is worth, you will still be paying an annual insurance premium of over 1% of the remaining principal to protect FHA from you defaulting on your loan.  It would be fair to call this a fee rather than an insurance premium, since there’s virtually no risk to insure against!

These fees are becoming so significant now, that buyers should consider FHA loans a last resort. Essentially, the borrower is paying just under 2% of the loan amount at inception (financed with the loan so you don’t noticed it as much), plus more than 1% of the remaining principal each year for the life of the loan.

When they can, home buyers should consider non-FHA options (“conventional” mortgages), many of which offer low down payments and lower MIP fees. 

Analysis shows amazing surge in buyer activity

Here's the statistical analysis I do at the end of each month showing the percentage of MLS inventory that is under contract by city, county or area.  Not only was the surge in percentage from December 31 to January 31 the highest of the last 13 months, but the percentages in each area were higher than at any time in 2012 except for the months & areas shown in red:

The chart below shows that this surge in buyer activity was reflected in every price range, too, although the increase was softer in the $600's:

For a frigid January, this activity is extraordinary.  Would-be sellers would be well advised to put their homes on the market now instead of waiting for the spring or summer "selling season."

How Hot Is the Real Estate Market? One Listing Draws 26 Competing Offers

[Published Jan. 31, 2013, in the Denver Post and in four Jeffco weekly newspapers]

Last week a buyer asked me to show her a new listing in Golden proper. It was listed at $349,900, and the public remarks said, “Multiple offers. Highest and best by 9 a.m. Sat., Jan. 26th.”  I showed the house and submitted an offer for $365,000 with an additional provision stating that the buyer would pay $1,000 more than any competing offer.

By Saturday afternoon, the 5-day-old listing was under contract — but not with my buyer. The listing agent explained that he had had 50 showings and 26 offers, many of them over $400,000. Four other offers had escalation clauses, too, but they were higher than mine.

What sticks in my mind from this experience is that there are still 25 disappointed buyers out there ready to buy a house, if they could only find one.  This was literally the only such listing in Golden proper! 

What better time could there be to put a home on the market?

Curious to find out how other listings were faring, I sent an email survey to 13 agents whose listings had gone under contract in the previous week asking if they had multiple offers and whether their listing was under contract at or above full price.

One of those agents reported 11 offers on her listing, ten of them above full price.

I’m still waiting for most of the agents to respond, but I can tell you that 7 of those 13 listings went under contract in less than 10 days. A couple were “stale” listings — listings that had been on the market for 100 or more days — but it was last week that they sold. 

Buyers are learning that they have to act quickly when a new listing comes on the market, which is making it even more of a seller’s market than it already was. On Monday, I had a buyer wanting a home in a certain price range, and I showed him the only five homes which were on the market in his desired area.  At day’s end, he made a full-price offer on one of them, worried that it would be gone if he kept looking for “something better.”  That’s a fairly typical attitude nowadays.  I have had several buyers recently who hesitated and, before they knew it, their #1 listing was no longer available.

Two agents reported that they sold their listings before they even put them on the MLS, just from word of mouth. The sellers accepted their full-price offers, not even giving other buyers the opportunity to submit competing offers.

When a new listing, like my new listing at 324 Lookout View Drive, goes on the MLS, an email is sent to every agent for whom that listing matches search parameters they have entered. The Lookout View Drive listing resulted in 152 emails sent to such agents. Until recently, the number of emails sent was typically well under 100.

 

In my 11 years as a Realtor, I have never experienced the kind of seller's market as intense as we are experiencing now.

Featured Listing: South Golden Home with Mountain Views

[Published Jan. 31, 2013, in the Denver Post and in four Jeffco weekly newspapers]

 

324 Lookout View Drive, Golden CO 80401

There aren’t too many 1950’s homes that are offered for sale by their original owner, but this one is being sold by two  brothers whose parents bought it new in 1954. The view you see here is not from the street. This home was positioned to face its side yard. The view from the street is much less interesting — mostly just its driveway and oversized one-car garage. When you walk through the gate you enter the scene above — a beautifully landscaped yard fronting on a former irrigation ditch, and offering a great view of the foothills. The 1/4-acre lot includes a large garden area and storage shed.

 

2013 May Be the Year When Electronic Lockboxes Finally Take Hold Here

[Published Jan. 24, 2013, in the Denver Post and in four Jeffco weekly newspapers]

By JIM SMITH, Realtor ®

Like many front range Realtors, I have several electronic lockboxes in my closet, dating back to previous failed efforts to introduce them in this market.

Unlike elsewhere in the country, these “smart” lockboxes have never caught on in the Denver market. A few years ago, the National Association of Realtors introduced its own product called the Sentrilock, and several brokerages and individual agents invested in them, including me.

Every now and then I show a listing with one of these lockboxes, but I know many listing agents who, like me, prefer to use the older mechanical lockboxes. The only reason that this lockbox has been adopted to the extent it has is that showing agents don’t have to obtain the key card. Instead, access can be obtained by the use of numeric “one-day codes” which are issued by the showing service, and, as the term suggests, are only valid for one day. Come back the next day and your code will not open the lockbox.

A newer technology was been introduced by Supra, the company which manufactures the most common mechanical lockboxes currently in use in our market. Supra’s version can be opened using a smartphone app.

This approach has great advantages over other approaches, especially as more and more real estate agents adopt smartphones. Because the agent’s phone has internet or at least cell connectivity, the information regarding each showing can instantly be communicated to the listing agent and the seller.  One such application would be to notify the homeowner the moment that the showing agent re-locks the lockbox and has left the property.

I have been told that Sentrilock is likely to introduce a new generation of its lockbox that will use this kind of technology.  If they don’t, they risk losing market share, so I’m guessing the reports are true.

To raise public awareness of the availability of electronic lockboxes, the current version of the state-approved listing agreement requires the agent to indicate whether a mechanical or electronic lockbox will be used.  The expectation is that if an agent checks the box for a mechanical lockbox, the seller might quiz the agent on why he or she is not offering the higher security electronic lockbox.

The most promising indicator that one or the other electronic lockbox will finally take hold in our market is that the Realtor associations serving the metro area have agreed to get together this week to discuss widespread adoption of an electronic lockbox. One of the associations already offers the Sentrilock product, but, depending on Sentrilock’s future offerings, this may or may not guarantee that they will be the chosen product.

The biggest disincentive to us agents in adopting electronic lockboxes always has been and will continue to be financial. Both brands of lockboxes cost over $100 each, compared to $30 or so for the current mechanical lockboxes. In addition, there is a monthly service fee of $10 or so per agent. To lessen the initial investment, the companies who manufacture the electronic lockboxes usually offer attractive programs under which they will accept mechanical lockboxes as trade-ins during the initial implementation period.  The fact that there are competitive offerings in the electronic lockbox market suggests to me that the Realtor associations could negotiate a sweet conversion deal with the winning vendor.  We’ll see.

Although our market hasn’t exactly suffered from our failure to adopt electronic lockboxes, it will be nice to get with this technology.

The Art of Giving and Requesting Good Feedback from Real Estate Showings

[Published Jan. 17, 2013, in the Denver Post and in four Jeffco weekly newspapers]

One of the most important services a listing agent can provide his or her seller is useful feedback from each showing — but he also has little control over getting buyers’ agents to provide it.

What the listing agent can do, however, is to employ a showing service which has an effective and dependable system for requesting feedback from each showing agent.

The showing service which I — and the majority of Denver area brokerages — hire is Centralized Showing Service (CSS), a national firm which has several call centers across the country.  Like RE/MAX Alliance and Coldwell Banker Residential Brokerage, my firm pays CSS to provide their service free to all my agents for all their listings, and it really makes a difference, including for getting feedback.

For $35 per listing, CSS answers their phones 7 days/week, 8am to 8pm (6pm weekends), and I have never experienced a busy signal or long wait time.  (If their Denver call center is busy, the call is routed to their San Antonio or Kansas City call center.)

What I like about CSS’s feedback system is that it allows the listing agent to specify the wording and the number of times that the feedback request is sent if no response is received. The first request is sent at the end of the showing window, so that it is in the agent’s email inbox as soon as he/she returns from the showing.

The listing agent can specify whether to use a multiple choice “survey” format, or provide a box for the showing agent to provide free-form feedback. I much prefer the non-survey feedback, and think it serves the seller better. It’s also friendlier to the showing agent.

A picture of the home is included with the feedback request, which can help the showing agent to remember which home it was.

The listing agent can specify whether the seller should receive the feedback immediately or only after it is screened by the agent. I take the position that my clients can take whatever feedback is given and I don’t want to slow down the release of that feedback to them. My sellers get the feedback simultaneously with me.

I firmly believe that it is the professional responsibility of every showing agent to give feedback, and email is always the best way. I think it’s rude to call an agent before giving them a chance to respond by email.  The wording of my email requests through CSS is “Please respond to this request so I don’t have to bother you on your cell phone,” which is effective.

Agents who use a multiple-choice feedback request often ask if the price is low, high or just right. How can the agent or seller expect a useful or honest response? If the showing agent is preparing an offer, do you think they’ll tell you the price is right — or low?  And if they’re not preparing an offer, how can you expect them to do a market analysis on your listing?  As a buyer’s agent, I wait for an expression of interest in buying a listing before I look at whether the price is high, low or reasonable.

CBI Gives Priority to Gun Checks

[Published Jan. 17, 2013, in the Denver Post and in four Jeffco weekly newspapers]

To be licensed as a real estate agent, mortgage broker, or many other professions, you have to pay for fingerprinting and then pay the Colorado Bureau of Investigation (CBI) $39 to do a background check using those fingerprints.

However, when you purchase a gun, you pay the CBI nothing for the background check and — here’s the kicker — the CBI gives you priority!

Right now there is a 3-4 month wait for new real estate licensees because of the volume of gun background checks at the CBI.  Is there a compelling public policy rationale for making people seeking employment wait behind those who want to purchase a gun?

Golden Real Estate has one such agent waiting for his CBI clearance so that the Division of Real Estate will issue his license to practice real estate.  In Colorado, it’s guns over bread and butter.

 

Arvada Home Has 5 Bedrooms & Mountain View

[Published Jan. 10, 2013, in the Denver Post and four Jeffco weekly newspapers]

This home sits on a quiet knoll in Arvada, with a mountain view from the deck outside the master suite. Four bedrooms are upstairs, and a 5th bedroom is in the 75% finished basement. In addition to the 2-car garage, there is extra off-street parking both inside and outside a 9’6” wide gate. Since there are no covenants, you can park your RV either inside or outside of that gate. Outside the 12’x21’ family room with its gas fireplace is an equally large covered patio. Inside, there is hardwood flooring in every room except the kitchen, including under wall-to-wall carpeting. Open this Sunday, 1-4 p.m.