The mechanics of short sales in real estate

There are not many “ways out”, once you are in a tight spot as a home owner, who’s going through some financial problems and finding it hard to reimburse the debt amount to his/her lender or mortgagee. Most of the times, you are left with no other options but to withdraw from your home ownership, either by means of foreclosure or “short sale”. A short sale occurs when you sell your home (of course with the consent of the lender) to some buyer at a price that’s less than the owed amount of debt. In case of a short sale, lenders keep the money, buyers get the home and the sellers are left with … well, nothing but at least they can save themselves from dishonor and bad credit record that comes with foreclosures or bankruptcy.

Mostly, three major stakeholders are involved in a short sale, namely seller, buyer and lender. Let’s discuss the transaction one by one, from their standpoint.

Seller:
Though seller gets nothing (of a monetary value) out of “short sale”, still he/she is the one who is the most concerned. As a seller, you should keep some points in mind. First, the lender will not always absolve you of the remaining debt. Second, the credit history doesn’t really remain unmarked in case of short sale (though the bad impact is less than the foreclosure). As a seller, you must put forward a very strong case for the bank's loss mitigation department, an application providing valid reasons with documented proofs (especially if you have cited the "decline in property prices" as the reason for short sale).

Lender:
Lender is of the paramount importance in a short sale, buyers and sellers cannot proceed with the deal without the lender’s permission (In case there are more than one lenders involved, consent from both parties will be needed). Mostly lending banks permit sellers to carry on with the short sale to save all the costs and complications attached with foreclosures, but not before going through a thorough checking and verification process.

Buyer:
Homes at short sale notices are typically low-priced (not lesser than foreclosures though). But the biggest drawback in going for a piece of "short sale property" is the amount of time it can take before the deal is finalized, mainly because it's not the seller but lender who'll approve or disapprove the offer. As a buyer, it makes sense to involve a real estate agent, who has previously dealt with short sales. Short sale homes are supposed to be in better condition than the foreclosed ones, but you must hire a home inspector to do the inspection in any case.

Some guidelines for Home Inspection

As a home buyer, you don't need to be reminded on how important home inspection is, before you close the deal. Isn't it quite obvious that you must confirm that walls, rooms, electrical systems or other building blocks are in satisfactory condition? For this purpose, you can find professional home inspectors who are professionally trained to carry out such inspections. They have the experience, tools and software to complete home inspection in a more thorough and accurate manner. However, if for some reasons you can't avail the services of home inspectors, you must be able to inspect yourself and spot the problems that may surface in near future, then you can ask the seller to fix them.

Interior and Structure Issues:
Take a look at rooms, kitchen, stairs, bathroom and basement area. Check out room dimensions (length, width, and height), walls, ceiling, paint, and the size of doors. In kitchen have a close look at the condition of ceiling, kitchen counters and gas pipelines. Moving to the bathroom, check for the ventilation system, bathroom plumbing, sink, hot tubs and showers. For a layperson, structural problems are the most difficult to figure out, for that start with observing the material used in foundation and construction, check wall thickness, if there's some wooden work then make sure it's not damaged by insects or fungal. Similarly if you are dealing with concrete structures, try to identify the problems like cracking.

Issues related to plumbing and Electrical Systems:
Check for the main panels, electric meter, circuit breakers, wiring, fans and other electrical components. Study the quality of wires and cables used in the wiring; also look for the security measures. Regarding plumbing, check out the water supply lines, pipe materials, valves, vents, water storage facility, also make sure sewerage system is intact.

Heating & Air conditioning Systems:
Proper heating or air conditioning systems (depending on the type of weather you have in your region) are very important. If the weather generally remains cold, pay special attention to the age and condition of heating system, fuel type, and distribution system, in addition to this you can insist on some hot water systems. Similarly, check out the air conditioning system, humidifier or system type if you are residing in warm zones.

You may want to examine home appliances, garage, or moisture and drainage indications. To cut the long story short, you are free to scrutinize just about anything, just don't start turning down all homes just because they have some minor issues, as almost all buildings have drawbacks.

Importance of Property tax and its implications

Tax is a financial charge enforced on citizens (individuals, businesses, legal entities) by the state. It is one of the largest sources of Government revenues. Property tax is one of these taxes and is charged from the owners of some real estate properties like land, houses, commercial plazas or any other type of realty (Note that tax levied upon vehicles, bonds or stocks is also called property tax). Property tax is normally calculated as a percentage of the total value of property and property valuation is carried out by appraisers representing taxing authorities. Different countries have different set of rules in accordance with their own needs and objectives, UAE for instance charge no property tax (buyers and sellers have to pay a tax at the time of property transfer though).

Real estate taxes are often enforced on its owners, but property tax can also be imposed on property transfers or income coming from possession of some property. All types of real properties and property ownerships like agriculture, grazing, farm houses, industrial, tenancy, shops, homes and shops have different implications/exemptions jotted down specifically for them. Also, there are tax exemptions for special cases like old citizens or widows in many countries. The ownership tax is normally payable after one year time. Apart from generating revenues, governments may use these property taxes to curb speculative investments in real estate market. However these taxes can have some negative effects as well, for example increasing urban spread out (known as sprawl).

Land Value Tax:
Unlike Property tax that is levied upon the real estate, land value tax is a direct tax on the value of land. At present, it is imposed in Australia, Hong Kong, Denmark, etc. Lots of economists are of the opinion that Land value tax is a better option than property tax, first because it is easy to calculate and second because it can take care of some loopholes in the economic setup (e.g. discouraging land owners to hold the land for no reasons). However, it is hard to implement in countries where it is difficult to ascertain real land owner.

When talking about saving on property taxes, you can’t have a general advice as rules and regulations differ in different countries. However, by reading and understanding your local laws (especially the valuation method) you can save a considerable amount. Many taxpayers often avoid going in details or getting in dispute with taxing authorities, but you’ve got every right to know exactly what are you paying for?

Illuminating real estate bubbles and real estate corrections

It’s known as a bubble but when it bursts, the after effects are definitely not pleasant (as they are when you pop a real bubble). When a real estate bubble (or housing bubble) goes off, it almost blows up the whole economy and leaves investors and property owners in distress. For instance, you purchased a property in a fast growing real estate market for 300,000 US dollars back in 2000, the real estate prices appreciated and your property price reached up to 800,000 USD in 2006, then the inevitable starts happening (known as the bubble burst) and your property price declines to a meager 250,000 USD in a matter of months. That is how devastating these housing bubbles are, and the worst thing about them is that they are hard to foresee, even if you are a veteran in economics.

Real estate bubbles (or any other type of financial bubble) are not just detrimental once they start to come apart, they are equally damaging to the overall economy even during the course of their build up. A rapid increase in the prices of real estate properties sounds good, and some investors might be able to go home with huge profits, but when we look at overall effects, we come to an conclusion that housing bubbles should be avoided (or at least curtailed by the regulatory bodies) at all costs. First because the abnormal hikes in property prices are based on shaky grounds and second because they are always followed by a very inconsiderate decline in price (known as real estate or housing market correction), which leaves many property owners with negative equity.

Real estate bubbles are normally dubbed as real estate booms, because it’s hard to distinguish between a “bubble” and a “boom”. However, a careful comparison of property prices and relevant economic factors can provide us with a pretty clear picture of what’s going on in the market.

Real Estate Corrections:
Real estate Corrections are quite the opposite of "Real estate bubble", in fact real estate market correction starts right after the burst of real estate bubble. It is the time when prices tumble and take a nose dive, if the sharp rises in real estate prices correspond to "real estate bubble"; it's the sharp decline in property prices that characterize "real estate correction". This correction in price is bound to happen once the real estate prices have reached the peak, though these corrections are not abrupt and it can last some years. Sometimes the prices can be reduced to the half of what they were at the peak of "Real Estate Bubble".

How beneficial is Home Warranty

By the name of it, many people misinterpret home warranty as some warranty that covers everything (including interior, house structure and even paint). In reality home warranty is merely an insurance for your home appliances (still, not that bad? The home appliances include fans, air conditions, heaters, oven, washing machines and other domestic devices. Home warranty mostly comes into the consideration at the time of sale, though it has no real implications, a home warranty from the seller or real estate agent can add to your peace of mind as a home buyer. Just because the name is heard mostly at the time of sale, it doesn't mean you can't have one for the houses you are living in for years.

As in the case of warranties, the home warranty issuing company is responsible for repairing or replacing the appliance that stops functioning properly. Of course, they have some charges that you must pay on yearly basis just like and other insurance, plus you have to pay a small fee every time you avail their services.

Pros & Cons:
As stated earlier, a home warranty doesn't cover everything; hence you are not freed from all the worries or uncertainties that turn up at the time of home purchase. Still, a good home warranty can provide you with considerable assurance because it may cover heating systems, plumbing or electrical systems along with all the major appliances. In addition to that, home warranty will be perceived as a bonus for buyer when you put your home for sale. Coming to the negative aspects, home warranty works only in case of normal deterioration (wear and tear), your claim will be rejected if the problem was caused by inadequate use or maintenance. If the company (the one providing the warranty) rejects your claim, there's hardly anything you can do, similarly you can't force them to replace some appliance even if it's breaking down every other day.

Some Advise:
First, home warranty is not necessary, it's specifically meant for those who find it extremely irksome to go through repairing or maintenance work on their own. If you have purchased a newly built house, and all the appliances, cooling or plumbing systems are in good shape then home warranty is an unnecessary burden that you should avoid. When you are convinced that you can benefit by having home warranty, you should choose the best service provider after reasonable research. Read the terms and conditions carefully, specially the part that tells what's protected under the warranty and what's not. Moreover, chew on the possible circumstances where your claim can be rejected.

Different types of real estate investments

Real estate investments are of various types; you can single out any of them according to your requirements. Generally, you should consider following points when choosing one of them.

• How much capital do you have?
• Are you interested in short-term investment or long-term investment?
• A careful review of advantages and disadvantages

Coming back to our topic i.e. different types of real estate investments, following are some basic types of investment.

Rental Properties:
This is the most basic and probably the most commonly used method, you purchase a property, find some renter and rent it out after agreeing upon a fix amount of monthly rent. All expenses like maintenance, tax, mortgage payments lies on you (the landlord), while you secure a regular cash flow coming from the monthly rent payments. Not only that, but you can also benefit from property prices going up in the meantime. You can rent all types of properties, be it the residential, commercial or vacation rentals.

Advantages:
As mentioned earlier, you will be getting a regular stream of income while keeping the possession of property rights, therefore you can benefit from the increase in property value as well.

Disadvantages:
In case you are not able to get some reasonable tenants straight away, you are stuck with your investment, which is supposed to be a large one. Also, the irksome chores of maintenance or dealing with troublesome occupants can prove to be a little too much for some landlords.

Property Flipping:
Property flipping is most common in real estate markets going through significant growth. In these markets (where property prices are soaring), you can purchase a property and put it up for sale straight away, because the prices are rapidly increasing, you should be able to make profit instantaneously. More experienced investors also go through some renovations in the property (known as fix and flip) to secure maximum profits.

Advantages:
This type of property trade (buying and quickly selling) is not recommended for rookies, as it involves quite a number of complications. However, lots of experienced and shrewd investors have managed to make quick money, by just flipping the properties in booming markets.

Disadvantages:
An unsuccessful attempt at property flipping (where you fail to flip the property to another buyer or the price goes down instead of rising) can prove to be disastrous. Stay away from this type unless you are sure of your foreseeing skills.

Indirect Investment (Investing through REIT):
If you are short of capital (not enough to purchase a property on your own); you must be looking for an alternate that’s easy on your pocket. Investing in “Real Estate Investment Trusts” or real estate investment groups is one such alternative. Real Estate Investment Trusts (REIT) or groups are corporations, they invest in real estate and you can purchase the shares (quite similar to mutual funds).

Advantages:
This is easily the most liquid form of real estate investment as these securities can be sold anytime like stocks. You don’t require substantial funds to invest and the profits are often higher than normal stocks.

Disadvantages:
Just like mutual fund, you need to have a basic understanding of the market before you invest into REIT. Another negative aspect is that normally the growth rate in share values or dividend is minimal.

What rights do you have as a buyer in real estate purchase?

When stepping into a real estate transaction as a buyer, you have some rights to start with, and because it involves a very considerable amount, you should make the most of them. Most real estate buyers are quite uninformed about their privileges. Even if you engage some real estate agent to deal on your behalf, you cannot afford to be in dark about these rights.

Information & Inspection:
Property buyer has the right to get hold on all the information about property; similarly he/she can inspect (or hire some house inspector to examine) the house condition and look over into the issues like how much repair work is considered necessary? Does it has all the necessities like clean water or electricity, how old is the building or what sort of material is used in construction? House owner cannot object or refuse these inspections in any case. Also, you can opt to double check all the information provided by the seller for your own satisfaction.

No inequity:
Myth is that property owners (or sellers) have the right to turn down any buyer who's interested in their property on any grounds. These rejections are normally on discriminatory basis and some of the well known reasons are race, religion, marital status, or color … the truth however is that no real estate agent or property seller has the right to demonstrate any such injustice. There are laws like "Fair Housing Act" or "Rehabilitation Act of 1973" to prevent all types of discrimination in United States.

Privileges regarding financial matters:
First of all, you are free to choose the funding option of your own liking; seller cannot press you to go for some specific source. When you go to a lender, he/she is obliged to present all terms and conditions without any ambiguity to the borrower (declared in "Federal Consumer Credit Protection Act"). As in the case of house inspection, you can hire the services of some attorney to look into the terms of loans and advise.

Buying Agreement:
The form of buying/binding agreements varies, but in general it is a written agreement signed by both parties, if some mortgagee is also involved then the paper work is supposed to be a little more complicated. Another noteworthy authority that buyer has is the "cooling off" period that is a span of some days, during which you can drop your decision and cancel the deal for any reason.

These are just some of the rights and privileges that you retain as a property buyer, for an all-inclusive list, you should consult some real estate attorney in your area.