Real Estate Glossary

How much earnest money should I offer?

WHAT IT IS

Think of earnest money like a deposit. Sometimes buyers need to send a copy of their earnest money check with their offer, sometimes not. Your Realtor will know when you need a copy of a check.

Regardless, once the buyer's offer is accepted, the earnest money must be sent to the title company, who will cash the check.  Once cashed, the earnest money becomes part of the total purchase price of the house.

HOW MUCH IS RIGHT?

A lot of buyers ask "How much earnest money is the right amount?"

There's no "right" amount. And the amount of earnest money sellers expect and buyers offer moves up and down with the strength or weakness of the market. When prices were soaring and sellers could get multiple offers within 3 minutes of putting a For Sale sign in the yard, earnest money amounts soared too. I saw $25,000 earnest money on a $250,000 purchase.

These days prices are lower and buyers in many market segments have the upper hand. Earnest money amounts have generally dropped. I've seen $500 earnest money checks lately (Fall 2010).  I've seen amounts up to $3,000 too.

RULE OF THUMB

One rule of thumb about earnest money is, "put up as much earnest money as you can afford to risk." The idea of risk is important. Earnest money is forfeitable if the buyer breaches the contract.

In plain English this means that if you, the buyer, back out of the purchase for any reason other than the many allowed reasons, the seller has the right to keep your earnest money as compensation for the lost time on the market.

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Read about the entire buying process

Search the MLS, part 3

Here are the Cliff Notes for part 1 and part 2 of this Pulitzer-winning series on why home shoppers who think they can search the MLS are mistaken:



There is no 1 MLS, there are only lots of city-wide, regional or statewide MLSs.

Consumers can’t search the MLS for their region directly because that database is private and for subscribers only. (i.e. Realtors, appraisers, etc.)

Instead, consumers can view a data feed from the private MLSs. This is shown on thousands of public websites like Trulia and Zillow, Realtor.com and the like.

For a variety of reasons, the housing data consumers on public real estate websites is often imperfect, incomplete, out of date or inaccurate.

Now that you’re all caught up, we’ll move on. But note that consumers can get as close as humanly possible to searching the private database called the Arizona Regional MLS by using our "Search Phoenix Homes" button, up above.



Finding the Seller’s Realtor is Difficult.


A very few sites make it easy to find & contact the seller’s Realtor. Trulia.com does this and so does Homes.com


margy court on trulia DOT com (click any graphic to enlarge it)


Several websites list the brokerage who represents the seller but not the individual agent. Realtor.com and MLSonline.com are two of these.


Margy court on Realtor DOT com revised



Most sites offer no opportunity to locate and contact the seller’s Realtor. In fact, many websites try to purposely misdirect consumers into contacting a Realtor connected with the displaying website. Among these: ZipRealty, Redfin.com, AZmoves.com (which is the Greater Phoenix Coldwell Banker website) and a whole ton of others.


margy court on zillow


Finding the seller’s Realtor on a typical home for sale is difficult enough. Communicating with Realtors who list bank owned homes is next to impossible, mostly because they’re so over-busy.


Our colleague Kris Berg San Diego Castles Realty posted a really funny cartoon about how difficult it is to get in touch with the agents who list bank owned real estate.


If you’re a buyer trying to reach the seller’s Realtor on a bank owned foreclosure (REO) home, you should also try winning the lottery. Or accurately predicting the end of Lost.


Tomorrow. . . is there a benefit in finding and working with the seller’s Realtor? In other words, is all that beating your head against the wall worthwhile?

Search the MLS, part 2

For those who didn’t read my previous post about the myth of “searching the MLS” here’s the Cliff Notes version:
There is no 1 MLS, there are only lots of city-wide, regional or statewide MLSs.

Consumers can’t view the MLS for their region directly because it’s private and for subscribers only. (i.e. Realtors, appraisers, etc.)

Instead, public real estate websites like Trulia, Zillow and dozens thousands of others display homes for sale which they get from a data feed provided by one or more private MLSs.

There are two very important things consumers should keep in mind when they try to search the MLS are house hunting on public real estate websites. (1) Data integrity isn’t what it could be. (2) As a consumer, finding the agent who represents the seller is often difficult.

Today I’ll cover data integrity; come back in several days for info on finding the seller’s Realtor and why you maybe don’t really want to bother.

Data integrity on public real estate websites: spotty


Sometimes data shown on public websites like Trulia, Realtor.com, Zillow, Dwellicious, etc., is a little bit ‘off’.  There are a few causes.

Some real estate websites are slow to update their data from the MLS data feed. Sometimes the websites didn't pull the entire data feed available to them, resulting in homes that are for sale but not shown on the website you're visiting. Sometimes bad data is just a case of Garbage In, Garbage Out: if the seller’s Realtor makes a typo while entering the homes into the private MLS, that typo carries through to every site that grabs the MLS data feed.


Zillow is the ultimate mashup of data and suffers the consequences of most mashups: too many cooks in the kitchen makes for bad soup. Zillow pulls a data feed from the ARMLS (Arizona Regional MLS), the county tax assessor's office, local Realtors who answer consumer questions in Zillow's chat section, and a variety of sponsors (read, paid advertisers) like mortgage officers and credit repair scammers agencies, etc. Trying to cram all that data into one pretty website results in data problems. Zillow admits that it's 'zestimates' are very imperfect. For Maricopa county properties (most of the Greater Phoenix area is in this county) are 10% too high or 10% too low in nearly 6 out of 10 cases. As Chris has said in the past, Zillow is like the kid who gets 6 out of 10 math problems wrong on a test. That's not a grade you want to hang on the fridge.


Many (most?) times the bad data found on public real estate websites is caused by layout & design issues, or maybe software incompatibility issues between the MLS data feed and the database of the receiving website.

For example, Realtor.com and Trulia.com both display one of our current listings for sale: 2835 W Margy Court in Phoenix. Both sites received the exact same data feed from the private ARMLS (Arizona Regional Multiple Listing Service) site.

Realtor.com has great information on this home but the presentation a bit ugly.

margy court on realtor DOT com

margy court on realtor DOT com continued (click to enlarge)

But Realtor.com does provide a handy-dandy “Refreshed at” time so online shoppers know that the Realtor.com site updated their data feed from the local, private MLS only 9 minutes ago (note, I’m unable to verify that). That’s some fresh info!

Trulia on the other hand, has less than perfect information but it’s displayed prettily.

margy court on trulia DOT com

Trulia says the neighborhood is “Alhambra” but it’s actually named Harbor Cove. Trulia also lists the sales price and date of the last time the home was sold, but they get that data wrong.

Two public real estate sites gathered the same data about this house from the private ARMLS data feed, but the resulting data displayed for consumers is different.

We’re all in this together. . . or are we?


Finally, sometimes the problem of real estate data that’s a little “off” is caused by pesky geographic differences. We’re a Big Country after all.

Realtor.com has a data field called “Parking Features” and that field shows “Electric Door Opener” for our listing. True, the house does have an electric garage door opener. But that’s such a common thing in newer Phoenix homes that few Phoenicians would think of it as a “feature”. More like “duh, expected.”

I’m pretty sure there are parts of the country where electric garage door openers aren’t standard. But Realtor.com is a national website, so they display some data that makes sense to Chicagoans (for example) but not to Phoenicians.



Search the MLS – a better way.


Consumers demand accurate data when they search the MLS shop for real estate online. But if the public real estate websites all have little, varied problems delivering that accuracy, what’s a consumer to do?

I can only speak for the Greater Phoenix area where I work. Here, there’s a better way and it’s found on many Realtor’s websites. Scroll back up to the top of this page on this website. See the big button that says Search Phoenix Homes? Click it. Search till your fingers go numb and your vision goes fuzzy. You’re as close as a consumer can get to the private MLS data.

Let’s compare the private MLS data to the consumer data available through our Search Phoenix Homes button. The search I’m using is for:


  • single family homes


  • 2 bedrooms (not more, not less)


  • located in ZIP code 85016


  • priced between $100,000 and $125,000


Private MLS view seen by Realtors, appraisers, etc.


2-1 in 85016 from 100k to 125k FROM MLS (click to enlarge so you don’t go blind)

The Phoenix Agent’s Search Phoenix Homes view available to consumers searching for the exact same thing:

2-1 in 85016 from 100k to 125k (click = enlarge)

 

If you click the pics above, you'll see that the consumers are seeing exactly the same data I can see as a Realtor in the private, members-only MLS. Yes, it is true that our search – like every other search - is displaying a data feed. But. . .


  • our display/graphic layout is an exact duplicate of the private MLS,


  • every home that’s in the private MLS is on our website, and


  • the data is updated in real-time.


  • True, you’ll still see garbage-in, garbage-out typos because I’m not the punctuation police. Yet.


 

Eagle-eyed readers spotted the one difference between the two search display results. On the far right hand side of each graphic above, the private MLS that Realtors can view shows the seller’s Realtor; the consumer side shown by The Phoenix Agents’ Search Phoenix Homes doesn’t.

In part 3 of this series, I’ll look into whether or not consumers can find the seller's Realtor while surfing online. And in part 4, I'll talk about whether buyers who work with the seller's Realtor save any money doing so.

Why you can’t search “the” MLS


  • MLSonline.com

  • MLS.com

  • MLSlistings.com

  • TheMLS.com

  • Realtor.com

  • RealEstate.com


None of those are “the” MLS, or Multiple Listing Service. Listen up peeps, there are two giant misconceptions out there about consumers’ ability to search the MLS. (and see also our own Kelley Koehler on searching "the MLS")

Consumers can’t search “the” MLS because there is no single, national MLS*. And if there was, consumers probably couldn’t view it directly.*

What consumers think of as “the MLS” is a bunch of local or regional private, subscribers-only databases.  Here in the Greater Phoenix area we use the Arizona Regional Multiple Listing Service, or ARMLS. Realtors, brokers and appraisers are the biggest dues-paying subscribers. Consumers cannot access this database directly.

So what are – the consumer - you looking at when you “search the MLS”? Almost always, consumers see a data feed taken from one or more local/regional MLSs.


  • Trulia.com , Yahoo.com, Zillow.com, Roost.com, Dwellicious.com


  • RealEstate.com, Realtor.com


  • Homes.com , PhoenixHomes.com , HomeListings.com , HomeGain.com


  • HouseHunt.com , NewHomesSection.com, NewHomeSource.com


  • AZcentral.com, AZhomesForSale.com, AZlandSale.com


  • PhoenixPowerSearch.com, ArizonaPropertyForSale.com


All of those sites display for consumers the data feed they accept from one or more local/regional MLSs. These sites accept the data – bits and bytes, 1’s and 0’s – and display it on their own website alongside banner ads, pop-up ads, pay-per-click ads, and anything else they choose to display.

I’m not going to cover the arguments about whether or not there should be a single, national MLS, and whether or not consumers should be able to view it directly. Why? Because we designed this blog for consumers, not for Realtors and brokers.

Instead, in my next post I’ll explain the 2 factors consumers must be aware of when searching the MLS searching for homes online. Meanwhile, consumers can get as close as possible to searching the MLS by using our handy "Search Phoenix Homes" button. Scroll up, click and search till your eyesight goes all blurry.

Your formerly a school teacher Realtor,

Heather Barr

*There is no “the” MLS, yet. There’s a push afoot in the industry to create a national Multiple Listing Service which would display every house for sale, anywhere in the US. There’s also a movement within the industry to make that national MLS – if it ever comes to be -- visible to consumers directly. As far as I can tell, these two movements have been around for awhile now; we’ll keep you posted if anything ever comes of them.

What’s a mortgage rate lock?

Courtesy of a finance blog I read regularly, Dan Green at The Mortgage Reports. He explains mortgage rate locks better, and quicker than anyone I’ve ever encountered.



A Rate Lock Commitment is a bank's promise to honor a specific mortgage rate for a specific period of time.  It's a contract, of sorts, in which the lender says: "Provided you close on your loan in the next however-many days, we'll make sure you get your locked rate."

Want more information? Lots more? Visit the Consumer’s Guide to Mortgage Lock-Ins by HSH Financial Publishers. In addition, the Federal Reserve publishes a pamphlet about mortgage rate locks.

New GFE and HUD-1 Settlement Statement “help” buyers?

The Federal Department of Housing and Urban Development (HUD) announced changes to the Real Estate Settlement Procedures Act (RESPA) last fall, with 2 of the more noticeable changes going into effect on January 1st, 2010.

The changes were made in an effort to better inform and protect the consumer (borrower).  I like what they tried to do; I’m not sure the end result is exactly what they were shooting for.

Good Faith Estimate

This form, issued by mortgage brokers and bankers at the time of application, has now been standardized, which should make it easier for consumers to compare various lenders’ charges side by side.

In addition, the GFE was divided into 3 sections:

Lender Charges – these are fees charged by the lender directly, and now must be EXACTLY THE SAME at the closing table as what was originally disclosed to the buyer.  This assumes the lenders should know their own fee schedule.  It also eliminates the old “bait and switch” tactics that some less-reputable lenders use.  This is good for consumers – no question.

3rd Party Charges – these are fees that are charged by people or companies whom the lender works with but whom the lender doesn’t control, such as appraisers and title companies.  These charges are now required to be within 10% of what was originally disclosed to the consumer.  I like this, as lenders should be in a position to know what the charges will be, although they don’t have final control.  Another win for the consumer!

Prepaid Charges – these are not charges by outside parties as much as expenses the homeowner will incur as he/she owns a home.  Examples include homeowners insurance, property taxes, and mortgage interest.  These fees will vary according to what day the loan closes, and as such are allowed to vary from the initial disclosure.

Overall the new GFE is a home run for consumers.  The HUD-1 Settlement Statement (closing statement) is another story…

HUD-1 Settlement Statement (closing statement)

Good News is the HUD-1 now incorporates the new-standardized GFE, and is broken out into the same 3 sections.  It shows very clearly what the initial disclosure was and what the actual charge is.  Chalk up one more win for the consumers.

Bad News is the HUD-1 no longer breaks out each individual charge as its own line item.  Many charges are grouped together at a summary level, such as “Settlement, Escrow, or Closing Fee.”  The problem with this is it’s now impossible to see exactly which fees are being charges to the buyer and which to the seller.

Here is an example.  I have a transaction where the buyer and seller are supposed to split the escrow fee, which is common in Arizona.  The HUD-1 shows:

Line 1101, Title services and lender’s title insurance to Buyer: $1,298

Line 1102, Settlement, Escrow, or Closing Fee to Seller:  $562.

Where exactly is the Escrow Fee the two parties are supposed to split?  A little further digging, and a separate closing statement prepared by the title company, revealed the following:

  • Buyer’s $1,209 on Line 1101 is made up of:  $427 Escrow Fee, $100 e-doc fee, $671 Title insurance charge, $100 PUD Endorsement fee.
  • Seller’s $562 on Line 1102 is made up of:  $427 Escrow Fee, $100 tracking fee, $35 express mail fee.

Turns out both parties did actually share the Escrow Fee - $427 each.  But you wouldn’t ever find it on the new form HUD released.

I hope the title companies are prepared to send over both closing forms on every transactions, because the new HUD form raises as many questions as it answers!

Good for the consumer, but far from being a home run…

Your giving his 2 cents Realtor,

Chris Butterworth

What Does AWC-I Mean?

AWC means Active With Contingencies, at least in the metro Phoenix real estate market where we work. In plain English:




  1. The seller accepted a buyer's offer,

  2. They're under contract, but

  3. There are contingencies that must be satisfied before the sale can close, and

  4. The seller might accept backup offers.


Some common contingencies, in years past:




  • the buyer has a home that must sell before they can buy a new property

  • the seller instructed his/her Realtor to continue marketing the home, hoping for backup offers

  • the seller accepted a buyer's option offer to buy the home


However, in metro Phoenix today, the most common reason homes show up as AWC-I is that they are short sale homes with an accepted offer that's awaiting bank approval. (edited August 2, 2009: 89% of the properties in the AWC-I status are short sales. If you see a property coded AWC-I there's only a 1 in 10 chance that it's not a short sale.)


How long does it take to wait for short sale approval? Depends on the bank(s) involved with the seller's mortgages. Sometimes the seller's lender approves the deal in only 60 to 90 days; sometimes the seller's lender takes 6 to 9 months to approve the buyer's purchase contract. Sometimes, the seller's lender rejects the purchase contract, or demands different terms (issues a counteroffer).


Can a 2nd buyer offer more money than the 1st buyer, and get the home? (edited with more current info, Spring 2011) This sometimes happened in 2008 and 2009. As of mid-2010 and beyond this almost never happens. Bumping out another buyer is actually a serious breach of contract law and most Realtors will never do it. But banks are the ultimate "deciders" in a short sale situation, and banks frequently don't act as if they feel bound by contract law. So, in theory a 2nd buyer could bump out a 1st buyer, but in day-to-day reality in metro Phoenix, this almost never happens.


Did you know AWC homes show up as Active (for sale) in many national real estate websites? AWC is a hybrid, in-between status that metro Phoenix uses that isn't recognized by a lot of the national websites like Zillow and Trulia. It can be really frustrating for online shoppers to see homes marked Active that are really sold, and just awaiting final approval of the closing.


For more information, try reading some more articles in our Foreclosure category or our Short Sales category.  Ready to search for homes online? We offer the best access to the live MLS data, updated in real-time!  Search only foreclosure homes... search only short sale homes... or search all Phoenix-area homes.  Have additional questions? Contact me by email, phone, Facebook or Twitter and I'll be happy to chat.

Foreclosures: Read the Fine Print

Buyers should read the fine print on bank addendums very carefully before agreeing to complete the purchase of a foreclosed (“REO”) home.

I’m reading a bank’s REO Addendum now and I’ve got 2 problems with it.  1) It removes the buyer’s financing contingency after the “Financing Commitment Date.” 2) The actual Financing Commitment Date is left blank.

In part, the bank Addendum says
. . . If Buyer delivers written notice to Seller that … financing has been declined (a “Notification of Decline”) prior to the Financing Deadline, then the Agreement to Purchase shall become null and void and the Deposit shall be returned to Buyer. If Buyer fails to deliver to Seller either a Commitment [i.e. full loan approval] or a Notification of Decline prior to the Financing Deadline, then Buyer shall be deemed to have waived the foregoing contingency and the Agreement shall remain in full force and effect without any such financing contingency.

If that doesn’t sound scary to you, keep reading to see why it IS scary.  If you already know how to read and interpret legalese, you know where I’m headed: caveat emptor.

What’s a Financing Contingency?


In a standard purchase contract, the buyer’s purchase is contingent on getting a mortgage.

If the buyer’s loan application is denied at any point in time – up to and including closing day – the buyer notifies the seller in writing “my loan was denied” and she/he gets his/her earnest money deposit back.

The buyer goes on his merry way. Or maybe it’s his depressed way. But at least it’s not his “poorer because I lost my earnest money” way. (there can be extenuating circumstances, but this is the gist of the contract language)

What’s Wrong With This Picture?


Back to the example above – remember, the bank’s REO Addendum removes the buyer’s financing contingency after the passing of the “Financing Commitment Date,” which is left blank.

What Does This Mean?


I can see this potentially going very, very badly.


  • IF my buyer client is denied her mortgage loan,


  • THEN we inform seller in writing “loan denied” and say “please give us back buyer’s earnest money.”


  • IF bank doesn’t feel like giving earnest money back because they’re bleeding red ink all over their quarterly government filings showing what they did with all that taxpayer bailout money,


  • THEN they could use the blank Financing Commitment Date to justify taking Buyer’s earnest money.


HOW? I used to work for a bunch of lawyers. I grew up listening to my Mom talk about the lawyers for whom she worked for over 20 years. Believe me, it wouldn’t be hard to find a lawyer who’d argue that that a blank Financing Commitment Date meant the buyer needed full loan approval at the time she signed the contract.

Slam, bam, thank you Ma’am. You’ve just been burned by legalese. Your earnest money? Gone.

(and I'm not even lawyer bashing; they’re just doing their job)

The Bottom Line


I’ve laid out a pretty far-fetched scenario. It’s highly unlikely the bank selling the foreclosed house expects the buyer to have a full loan commitment on the date she signed the contract to buy the house. (Technically, it’s 99.9%  impossible to have a full loan commitment on the date you make an offer.) It’s also pretty unlikely that a bank would actually take my buyer’s earnest money if we told them our loan was denied.

But as a buyer’s agent it is my job to anticipate and explain to my client the potential worst case scenario. Murphy’s Law says the minute I don’t, is the minute the worst case scenario hits my buyer in the face. Or the wallet, as the case may be.

Buyer Beware


Read the fine print on everything you sign. The banks selling foreclosed homes are not your friend. They do not wish you well. All they wish is to recoup as much money as possible on every house they sell.

My buyer is very likely to decide to go through with this deal. But at the very least, she deserves to know the risks she’s taking, upfront. And she deserves to make an informed decision, after hearing the potential risks (bigger risk of losing earnest money) and the potential benefits (nailing a screaming good deal on a solid little house).

Fannie, Freddie and Ginnie

FANNIE MAE


The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, [was] founded in 1938 during the Great Depression. [It’s] purpose is to purchase and securitize mortgages in order to ensure that funds are consistently available to the institutions that lend money to home buyers.  From Wikipedia.org


FREDDIE MAC


Freddie Mac is more formally known as The Federal Home Loan Mortgage Corporation. It's also a GSE and it's job is to buy mortgages on the secondary market, pool them, and sell them as mortgage-backed securities to investors on the open market. (excerpted from Wikipedia here)


GINNIE MAE


The Government National Mortgage Association (GNMA, also known as Ginnie Mae) is a U.S. government-owned corporation within the Department of Housing and Urban Development (HUD).


Ginnie Mae provides guarantees on mortgage-backed securities (MBS) backed by federally insured or guaranteed loans, mainly loans issued by the Federal Housing Administration, Department of Veterans Affairs, Rural Housing Service, and Office of Public and Indian Housing. Ginnie Mae securities are the only MBS that are guaranteed by the United States government. (shamelessly lifted wholesale from Wikipedia - here - because they do such a darn good job and I can't re-write it better than they did)


TROUBLED TIMES


Fannie and Freddie had some troubles in the early- and mid-2000’s which began in the 1990’s (some say the 1970’s), continued through 2004 and ultimately resulted in the federal government taking over the two mortgage giants in late 2008. Wikipedia does an excellent job of rehashing Fannie's history in four or five short paragraphs subtitled “Contributing Factors and Early Warnings”.

Too good to be true Phoenix MLS prices

Actually, the MLS isn’t wrong. It’s correct, technically. But it’s also deceiving. And the MLS data that’s viewable on public websites via a data feed is even more deceiving.

Take this ad for example. Yesterday, a buyer asked us to show him this home which he’d found online.

49k house MLS ad

(for all pics in this post, click picture to enlarge; use browser’s back button to return to post)

Yes, you read that ad right – it’s a Phoenix home with nearly 1400 square feet, 3 bedrooms and 2.5 baths, built in 2004 for $49,900. And it’s showing up on real estate websites as a “For Sale” home.

Here’s the interior photos. It’s looking better and better!

49k house KIT

49k house EIK

49k house BA

1400 square feet that look like this? For $49,900?!

Hold on. This house isn’t really for sale. Not anymore.

First, it’s a short sale. Meaning you send the seller an offer, s/he accepts it and then your offer goes to the seller’s lender for their approval. That could take 2 to 3 months. Could be less, but could be longer. Nobody knows. Essentially you set the price at today’s market rates, then wait months for acceptance of your offer. Meanwhile, you’re likely watching the market prices continue to go down.

Second, the fine print in the Realtors-only data field (yes, there are data fields that only Realtors who login to the private, paid-for, and meant for Realtors and appraisers only MLS database, can see – go back and read this) says “AWC-C” is the status. That means Active with Contingencies-Contingent (on buyer selling an existing home).

So they’ve got an offer already? Yeah, but it gets worse.

The sellers of this home accepted an offer on April 7, 2009 and sent it to the sellers’ lender for approval. (more data only available to paying Realtor/appraiser subscribers to the “real” MLS)

At first this house looks like a once-in-a-lifetime investment opportunity when you see it on Realtor.com, Trulia, Yahoo, Dwellicious, AZCentral.com or any of a million other real estate websites. The truth is, it’s already under contract, but there’s no telling how long it will take the seller’s lender to decide whether or not they’ll accept that offer or just take the home to the foreclosure auctions.

To rub salt in the wound, tax records seem to indicate that the original buyer (the current seller) put less than 20% down on the home at purchase. Which means the lender who’s contemplating accepting a short sale actually might get more money if they let the house to auction because then they’d get the insurance money payoff.

Still reading? There’s yet more salt for your wounds. A quick check of the satellite maps available to anyone who can spell GoogleEarth shows the house backs up to a commercial building and sides onto Roeser Road which is a pretty major road in this part of South Phoenix:

49k house sat map

Today more than ever, it’s buyer beware when you’re surfing real estate websites.

The escrow process explained again

I'm re-posting an article I wrote last year due to the number of first-time homebuyers in the market right now.  I hope you find this useful.

You’re ready to buy a house.  You write up an offer with your Realtor.  What’s next?

You’re trying to sell your house.  Your Realtor brings you an offer from a buyer.  What’s next?

The escrow process always raises questions from both buyers and sellers.  It can be confusing, and even overwhelming, because there are a lot of variables and moving parts.  On the other hand, every detail is spelled out line by line in the purchase contract, so there shouldn’t be any surprises.

It’s a good idea to read your purchase contract carefully (or even a blank, sample contract) and to discuss it with your Realtor before you have an offer in place.  But just in case you didn’t get a chance to do that, I’ve listed some of the most common events and time frames below.

Loan Status Report (LSR).  The Buyer should have already met with a lender, and should be able to provide the Seller an LSR.  This will show the Seller that the Buyer is able to obtain financing to complete the purchase.

Earnest Deposit.  The Buyer should be prepared to write a check on the day she makes an offer.  The check is typically made payable to the title company, and is held in escrow until the conclusion of the contract.  If the contract closes successfully, the Earnest Deposit will be counted towards the Buyer’s cash to close.  If the contract is canceled, the Earnest Deposit will be awarded to either the Buyer or Seller, depending on the timing and reasons for the cancellation, along with the rules spelled out in the Contract.

Day 0.  Your contract may be accepted as offered, or it may have several Counter Offers and Addendums included.  The Counter Offers and any Addendums add, define, clarify, subtract, or otherwise modify the terms of the original Offer, and are included as part of the Contract.  Once all parties have signed these documents, and the documents have been delivered to the other party (in writing), you have a valid Contract.  This date will be Day 0 for counting purposes.

Seller’s Disclosures.  Typically the Seller has 5 days to provide the Buyer a copy of the Sellers Property Disclosure Statement (SPDS) and a copy of their Insurance Claims History.

*Update* - With regards to the Insurance Claims History, there's a difference between a CLUE Report, provided by a 3rd party, and a Claims Letter, provided by the seller's insurance agent.  (Thanks to Matt Fox over at Insurance Renegade for this reminder.)

*Update* - The reason you want to know the insurance history is to make sure the home is insurable.  Sometimes, when homes have experienced too many or certain types of claims, the insurance companies won't insure them or will charge an exorbitant premium.  Talk to your insurance agent to make sure you can get insurance at a reasonable price for the home you're buying.

Buyer Acknowledges SPDS.  The Buyer will need to sign the SPDS and return them to the Seller.  This is not to say she agrees with them; merely to say that she received a copy of them.

Buyer Inspection Period.  The Buyer has 10 days to inspect the home - any and ALL aspects of the home.  If the Buyer finds anything she doesn’t like, she may either A) Cancel the contract and receive her earnest deposit back.  B) Give the Seller the opportunity to fix the items she disapproved of.  or C) proceed with the purchase.  If the Buyer chooses A or B, she MUST notify the Seller in writing before the end of the 10th day.  (and, of course, we have a pre-written form just for this purpose, called the Buyer’s Inspection Notice and Seller’s Response form - BINSR for short).  Failure to give any notice to the Seller is the same as option C.

Seller Response.  If the Buyer chose to give the Seller an opportunity to fix the items she disapproved of, the Seller will have 5 days to respond.  The Seller also has 3 choices to consider:  A) he may agree to fix everything the Buyer requested.  B) he may agree to fix some, but not all, of the items the Buyer requested.  C) he may not agree to fix anything.  Much like the Buyer during her inspection period, the Seller needs to respond in writing within the given time frame (5 days), especially if he chooses A or B.  Failure to respond is the same as choosing option C.

Timing - if the Buyer took all 10 days to inspect the home, and the Seller took all 5 days to respond, we’re now at Day 15 of the transaction.

Buyer’s Decision.  Once the Buyer receives a response from the Seller, she will have to make another decision.  This decision is much more simple, and there are only 2 choices.  A) she may agree to the Seller’s response and proceed with the transaction, or B) she may decide to cancel the contract (and be entitled to receive her earnest deposit.)

Timing - if everybody took the maximum allowable amount of time (10 days, 5 days, 5 days), we would be at Day 20 of the transaction.  So it can take about 3 weeks to get through the inspection process.

Quiet Period.  Many times the inspection process is wrapped up weeks before the scheduled closing date.  This will cause a Quiet Period, especially compared with how much energy can be spent on the inspection process.  The Seller will be working to make any repairs he agreed to make, and the Buyer will be working with her lender to make sure the loan is in order.  Both parties will most likely be working on other logistical items, such as packing, movers, utilities, etc.  But don’t get too complacent, because things will get hectic again!

Final Walk Through.  Sometime about a week before the closing date, the Buyer will do a Final Walk Through of the home.  She wants to make sure the home is still in "materially" the same condition as when she made the offer, and she wants to make sure the Seller did all the repairs he agreed to do.

Seller Signing.  The Seller will go to the title company’s office to sign his portion of the papers, generally 2-3 days before the scheduled closing date.

Buyer Signing.  The contract calls for the Buyer’s Loan Documents to be delivered to the title company 3 days prior to the scheduled closing date.  The Buyer should be prepared to sign his portion of the papers at the title company’s office at this time.

Buyer’s Funds.  The Buyer should be prepared to bring certified funds to title, or send a wire transfer, preferably on the day he signs.

Closing.  The title company will handle everything for the closing, and will make sure that any & all requirements are satisfied.  They will make sure they have all funds from the Buyer - Earnest Deposit, Certified Funds for the Down Payment + Transaction Costs, Loan Funds from the mortgage company.  They will make sure they have accurate payoff information for the Seller - 1st mortgage, 2nd mortgage, any other liens.  They will make sure they have everybody’s signatures on the Deed and any other legal documents.  Once they have everything accounted for, they will record the Deed at the County Recorder’s Office to show the change of ownership, and they will make the Seller’s Proceeds available to him.

Delivery of Keys.  Once we have word from the title company that the deed has been recorded, we’ll want to get the keys into the Buyer’s hands as quickly as possible.

** Disclosure ** The numbers, dates, and terms used here represent a hypothetical transaction in Maricopa County, Arizona.  This article is intended to provide an overview into the general flow of a transaction, and should not be taken as gospel.  Your transaction may include terms and dates which are very different from the examples given here.  You are advised to read your contract carefully, and to consult with your professional representation.

And that’s it - easy as pie.  A stressful process, but an easy-to-understand process.  An understanding of the process, coupled with a good game plan and lots of open co

mmunication can go a long way toward relieving some of that stress!

Your ready to answer any other questions you might have Realtor,

Chris Butterworth

 

Where to Find Homes Online

Did you know that consumers can’t view the MLS? You’re probably thinking “She’s loony. I was looking at the MLS online just the other day.”


Umm, no. You weren’t looking at “The MLS.”


First, a definition. The MLS  (a.k.a. Multiple Listing Service) is a privately-owned local or regional database where all participating Realtors list their properties for sale. In other words, the MLS is like a giant online bulletin board for Realtors only. Each city, town or region has their own MLS. There are probably tens of thousands of MLSs nationwide.


Metro Phoenix (which includes all of Maricopa County and some of Pinal County) uses the Arizona Regional Multiple Listing Service, or ARMLS. It’s pronounced “arm-less”, the thought of which always makes me giggle a little. Given the sorry state of professionalism exhibited by some Realtors, I’ve petitioned to call it “witless” or “brainless”, but that’s beside the point.


So what were you – the real estate consumer – looking at online if not The MLS?


You were looking at a for-profit website that grabs a data feed from one or more MLSs. Then the website designers re-jigger the MLS data and show it to their online visitors next to lots of shiny graphics and cool mapping tools.


Realtors don’t control the data once the other sites’ tech geeks grab the data feed. Here’s where I’m going to pause a moment and ask you to remember the childhood game of Telephone.


In Telephone, a bunch of kids stand in a long line. Then the first kid in line whispers a sentence (such as “I like peanut butter and jelly”) into the ear of the kid next to him, and the message whips downline to the kid on the very end of the row. End Of Row Kid says aloud what he heard (“I might pee under the telly”). Hilarity ensues.


The point is, data gets mangled during the relay. It’s funny when 8 year old boys do it. It’s not funny when it’s housing data and you’re house shopping.  Too often, online consumers are looking at housing data that’s incorrect, incomplete, outdated or just plain wrong. Usually they don’t even know it.


What’s a consumer to do? Use a Realtor’s website to access the ARMLS data directly.


With a hat tip to our broker Jay Thompson, who first did this a couple weeks back, here’s a comparison of the amount of that data you can see on various national real estate websites.



Search Query: 3+ beds, 2+ baths, $0 to $75,000 in Phoenix


(as of May 2, 2009 at about 10:30 am local time)


























SiteNumber of Properties
ARMLS1,975
Realtor.com775
Trulia.com536
ZipRealty.com1,037
AZcentral.com856

Clearly, the ARMLS has the most listings. The only way to see all of the available property listings in the ARMLS is to visit a Realtor’s website that has all the available listings. Can I suggest ours?


All member Realtors have access to every property listed in the ARMLS. But I believe our customer service and market knowledge is simply better than others’.


Search on!


(want more info on this topic? See this 3-part series about "searching the MLS")

Produce the Note, More Information

Back in late February I wrote a piece about using a tactic called “Produce the Note” to prevent your mortgage lender from foreclosing on your home.


A very nice gentleman called me yesterday and left me a voicemail, reminding me that I hadn’t posted the follow up piece I promised. Thanks for reading, sir! I’m sorry, and you’re right. I neglected to follow up.


The attorney I said I was going to call is Diane Drain. She’s a local attorney whom I met at a seminar she presented a few years back which was about foreclosure auction sales. Diane Drain has an excellent website with lots of information and sample forms you can file in court.


I put in a call to Diane’s office and hope she’ll have a few comments for The Phoenix Agents’ readers. If she’s able to speak with me, I’ll post her thoughts here!


Here’s what I think of Produce the Note, after letting it stew around in the back of my head for a couple of months. First, using the tactic in Arizona requires that you file a lawsuit. In my opinion you should hire an attorney to file a lawsuit, so Produce the Note isn’t free.


Second, Produce the Note isn’t very likely to make your mortgage lender roll over and cry Uncle. It’s a stalling tactic at best. If you reasonably think that you can save up enough money to come current on your mortgage (including all back payments, fees and penalties) if you just had more time, Produce the Note might help.


But instead of filing a Produce the Note lawsuit, you could also just hire an attorney to negotiate with your lender on a Forbearance Agreement. (Forbearance is a legal term for “gimme more time and then I’ll pay you back.”)


Bear in mind, I’m not an attorney and I don’t even play one on TV. If you’re seriously thinking about using Produce the Note, you should hire yourself the best attorney you can find.

Spuds and SPDS

Stock exchange Image ID 627651 by user awottawa photo credit to StockExchange user awottawa


Sellers who use a Realtor to sell their metro Phoenix area home quickly become familiar with enough acronyms to make the Federal government proud (and confused). ER, SPDS, BINSR, CLUE. In this example, the acronyms are enough to make any sane person wonder if their slightly daffy relative ran over a potato farm with the car and needs a ride to the hospital.


(That sentence is mildly smile-inducing inside my head; let me know if it tempts a grin in your neck of the woods.)


So, what’s a SPDS? And is it anything like the edible tuber that’s yummy when served with butter, sour cream and chives next to a big juicy Porterhouse? Read on, intrepid blog browser.



What Are SPDS?
Arizona law requires sellers disclose to buyers all known, material problems about properties they sell. The Seller’s Property Disclosure Statement (SPDS) document created by the Arizona Association of Realtors is a convenient form for doing this. Not working with a Realtor? You’re not exempt from disclosing what you know about the property. You’re just unlikely to have ready access to the nifty form.

Why Do I Need to Do This?
If you sell a property that has a material defect of which you were aware but didn’t tell the future Buyer, you could be liable to a lawsuit. Disclosing everything you know about the property you’re selling can protect you in the future.

What Should I Disclose?
The short answer is everything. The longer answer is that you should disclose everything that could influence a buyer’s decision to buy (or not buy) your property. This includes improvements you’ve made and problems you’ve had, as well as what you did to solve those problems. It also includes anything prior owners did to the property of which you are aware, or even things prior owners did that you suspect or only partially remember.

The bulk of the SPDS questions are phrased, “Are you aware of ….?”  If you aren’t aware, or don’t know the answer, you should answer “no”. Your Realtor is not allowed to fill out the SPDS for you, and is generally not supposed to tell you what to put on the SPDS. Realtors: offering guidance is OK; dictating answers is not.


On the last page of the SPDS form, you can add explanations. It’s OK to say things like -





  • I think the prior owner replaced some of the PVC plumbing with copper but I only got verbal info on that.


  • We had a tub leak in 2003. We repaired the leak and our insurance company replaced the drywall and carpeting.


  • We converted the garage into a living room in 1999. We didn’t get permits or HOA permission but we had licensed contractors do the work.


Can I Disclose Too Much?
Don’t worry about ‘killing a deal’ by disclosing what you know about the property. If there’s something that’s so wrong with the property that it’s bad enough to be a potential deal-killer, you should be more worried about getting sued later for not disclosing it now. It’s better to be honest on the SPDS and discuss the property’s condition upfront with your Realtor. Then let your agent make recommendations about properly pricing & marketing your home so that it sells to a buyer who knows all about it and buys it anyway.

How Long Do I Have to do This?
By contract, Sellers (through their Realtor if they have one) must provide the future Buyer with a written Disclosure Statement within 5 days of contract acceptance. Buyers, ask questions if you don’t understand the answers! Sellers, remember that honestly and completing filling out the SPDS form will take a little bit of time and some record pulling. So, the sooner you complete the document after listing the home for sale, the better. The last thing you want is to be scrambling to fill out a SPDS form at the 11th hour. It’s kind of like waiting to start your 1040 tax form until April 14.

You Can’t Eat It, But It Can Help You Sell
A complete and honest SPDS will help your property sell. Even if the property has problems, it can be sold . . . if it’s priced right, marketed correctly and properly disclosed.

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