A San Diego Real Estate Web Log

Real estate has been a real yawner lately. Inventory remains down, and now we are starting to feel the lethargy in the market among buyers which seems to strike this time every year. It’s the lazy days of summer.

So, in a weak attempt to manufacture intrigue, I bring you our latest installment from the Boring Stuff files, this one titled, “30-day escrow? Good luck with that.”

In yet another attempt to protect us from ourselves, we have a new regulation on the horizon, this one involving lending. From Wells Fargo, I received this:

On July 30, 2009, the new Housing and Economic Recovery Act (HERA) laws will go into effect. They require all mortgage lenders and mortgage brokers to help prevent deceptive lending practices and protect customers by helping them become more informed.

Cool! Only, what this really means is that your closing date, the one written into your contract around which you are scheduling moving trucks, utility transfers and a going-away block party, is rather meaningless. If you write in a closing date 30 days out, dream on.

Here is the official release from Wells explaining the implications of the new laws to the escrow time line. If you are long on free time, read it, then rejoin me at paragraph six below for a  recap. (Maybe it’s paragraph seven. I’m not sure if I am supposed to count the blockquote as a paragraph, but you get the point.)

If you got to part with the handy little closing calendar before dropping off face down in your coffee cup, you see that we are given a tidy 30-day closing scenario. There are a few “problems” with the calendar, however. That is because the calendar was intended for only those buyers and sellers living in Perfect Escrow Happy Land. In San Diego, where most of my clients live, the transaction is rarely perfect. And I am not even talking about mold, swarming bees, leaking pipes, the buyer’s vacation, the seller’s vacation, the other agent’s vacation, or an escrow office which won’t return phone calls or emails (all of which we were challenged by this past week). Nope, I’m just talking about the financing component of the transaction.

Here are the “biggies” in the moving parts department:

• Day 1 - Homebuyer makes phone application for loan. Yeah, right. I’m not saying it couldn’t happen. In fact some buyers who are really together come to the table fully pre-approved. I’m just saying that most of the time on Day 1, the buyer is tied up in meetings all day at the office, and on day two or three, instead of making a phone application, they are interviewing lenders, shopping for the best rates and terms. Or they are visiting their grandmother in Lithuania, a trip they scheduled in 1992 and simply can’t cancel.
• Day 3 - Initial disclosures are printed and overnighted to the buyer. Yeah, right. I’m not saying it couldn’t happen. In fact, some lenders are all over it and bust their hineys to meet the client’s needs. I’m just saying that most of the time on Day 3, the processor assigned to your file has also been assigned to 987 factorial to the 23rd power other files and is really busy and is “working on it” but then goes home sick, but it’s just as well because the computer system is down.
• Day 6 - Disclosures received by customer in overnight mail. Yeah, right. I’m not saying it couldn’t happen, but see “Day 3″ above. And even if it did happen, the customer will be at Legoland for his nephew’s birthday party when the FedEx package arrives, so the 16-year-old son of his next door neighbor will sign for it and put it in the pantry just before leaving for a three-week study abroad program in Lithuania.
• Day 7 - Earliest day to collect upfront fees (or, in Lithuanian, order the appraisal). Yeah, right. Granted, assuming that the customer did what he was supposed to do, the lender did what they were supposed to do, and the neighbor’s kid happens to be the one responsible teenager in the Delta Quadrant, it could happen. But, even if you have hit on all cylinders, the loan processor just returned from sick leave and is busy getting “caught up,” so your credit card is safe for now.
• Day 13 - Earliest day to close if no appraisal is required. Customer: “I am calling to see if the appraisal has been ordered.” Bank: “Appraisal? Hah! We don’t need one of those! How about we just close this thing today? The wire is on it’s way!” Yeah, right.
• Day 23 - Appraisal must be completed and mailed to the homebuyer 7 business days prior to close. Not fair! Now they are counting backwards. The reality is that, assuming your appraisal was ordered on Day 13, chances are you have not seen nor heard from anyone resembling a valuation professional. Or, your agent did meet someone with a tape measure at the property a week ago, but he was jet lagged, having traveled from Nebraska for this assignment, and he returned a value approximately 112% below the contract price, which caused the entire deal to crater on Day 20, which means we aren’t really even having this conversation. Oh, and by the way, we are on Day 23 in a state where the standard contract requires that the buyer remove all contingencies, including loan and appraisal, on Day 17. So, yeah, this could work.
• Day 30 - Buyer can sign/close (emphasis added). Yes, the buyer can sign and close today, assuming he dreams in color. First, the buyer can sign/close today if everything has gone perfectly according to the handy Wells Fargo calendar, which it has not. Secondly, the buyer can sign/close today if everything has gone perfectly according to the handy calendar and if he lives in a county other than San Diego, say, one in Lithuania. In San Diego, there is not a big pile of purchase money stacked at the center of the signing table just waiting for deposit once the ink has dried. Rather, loan documents typically go back to lender when signed for final review. (I am tabling the discussion of table funding here.) Review times are ofter 48 hours, at which point funds are requested, and everyone spends the next 24 hours playing “wait for the wire.”But, let’s assume that the pretend big pile of cash exists at the signing table. The San Diego County Recorder recently did away with the practice of recording “special” (late day). So, in order to record on Day 30, you must fund the day before (which is Day 29, using “old” math).The bigger issue yet is what they haven’t told you. You got lucky and your appraisal actually came in on target. If you know anything about the way we do things this month, you know that this triggered an appraisal review. Sometimes, this is just a desktop review (see Day 3 for expected review times), but often it is a brand, new, breathing appraiser who must appraise the property all over again. Whee! Since our calendar alotted 10 days for the first appraisal to be ordered and submitted, we must assume that this second exercise will take approximately 14 weeks.

Of course the one thing I didn’t address is that fact that if the buyer’s annual percentage rate changes by more than .125%, this triggers the requirement that a new Truth in Lending Disclosure be issued to and reviewed by the buyer (add 7 days, rinse and repeat).

The most important take-away is that as a buyer or seller, you really need to care that both the loan and real estate professionals involved in your transaction are tracking the process and generally know what the heck is going on at all times. This sounds like a reasonable expectation; so often it is unfortunately not the case.

photo credit: Zevotron

First, a big shout-out to our three readers for hanging in there with us while we took a short sabbatical. Nothing says vacation like a little time in a mountain cabin. By the numbers, ours involved one leaking faucet, one broken toilet, one laundering appliance that has decided heat is not an essential element in the drying process, and an empty bag where about three pounds of peanuts used to peacefully reside. We solved that last mystery, and because we are pretty sure our arsenal of squirrel food didn’t migrate lock-step to our bedroom closet by its own devices to shell itself, the exterminator has been summoned.

Clearly, our reunion post should address the dangers of deferred maintenance. But, where’s the fun in that? Instead, I’ll tackle an “Ask the Broker” question I returned home to regarding the purchase contract and a buyer’s failure to perform. It’s an issue we have unfortunately been faced with ourselves too often these days. James (not his real name) wrote:

We signed three extensions for our buyer because he was having trouble getting his loan approved.  We are currently out of contract by about 3 weeks.  The buyer cannot get the loan, but will not sign the cancellation of escrow.  Our agent keeps telling us the buyer is out of town. What are our options?  Our house is back on the market, pending cancellation of escrow, but no agent wants to show it under these circumstances.

This is where I am obligated to insert the proper disclaimers, stuff about how I am not an attorney, how I am not in a position to pretend to be an attorney, and how someone in this situation should consult an attorney (which I am not). There - I said it.

Forgetting the specifics for just a moment, this whole idea of being “out of contract” is becoming an ongoing saga for us in so many of our transactions. To our three readers, you undoubtedly only see the glamour of our work - the front end of teetering on our stylish, moderately priced pumps ankle deep in the gazania playing “find the lockbox” and the back end of making the congratulatory “you closed escrow” call. It’s everything in the middle that has been brain damage lately.

The contract (and I am talking about the California Association of Realtors “little “R” contract here, since I live in California) is packed full of timeframes. The idea is that there are all of these little things which must be checked off of the to-do list along the way. They involve obligations of both the buyer and the seller, and there are typically two big events during the course of escrow.

The first concerns contingency removal. Our contract’s default language calls for the buyer to remove all contingencies by the 17^th day following contract acceptance. This is simple enough, except it rarely happens these days without divine intervention. Loan underwriting takes longer, appraisals take longer, and the first appraisal is seldom good enough in the lender’s eyes, so we must rinse and repeat. Mostly though, buyers and their agents just don’t take the deadlines seriously.

Our contingency removals are accomplished using the “active method;” in other words, unless the contingency is removed in writing, it continues to live and haunt. Without written contingency removal, the buyer can take his deposit and go home, so sellers are generally in a pattern of holding their breath until it occurs. But what happens if it is time for the buyer to submit written contingency removal and he doesn’t? This is where seller-land can be a bummer. The buyer holds the cards, has the seller over a barrel so to speak. The seller can issue a Notice to Perform and then cancel, but the buyer gets his money and the seller is without a sale. Give the buyer more time to perform, and the seller is living on a day-to-day lease with no guarantee the sale will ever happen. In a declining market, time is truly of the essence to the seller. Having to start over again after two or three or more weeks is not only no fun, but it’s not advantageous financially.

But, back to our question which involves the second big event — close of escrow. In this case, I was told that the buyer had removed all contingencies. The real issue is that the buyer cannot obtain financing, so the seller is resigned to the fact that there will be no sale, at least not with this buyer. In a normal world, the seller would release the deposit, wave goodbye, and set about marketing their home again. For whatever reason, however, this buyer will not sign cancellation instructions. This means that the seller is saddled with an open escrow.

Unfortunately, the buyer has to agree to a return of the deposit. The purchase agreement is a bilateral contract; it takes two to get married and it takes two to break up. Escrow is a neutral third party charged with seeing that the terms of the contract are fulfilled. Escrow cannot change the terms with only the consent of one party. So, when our buyer here decides to be ornery and not sign cancellation, the seller is stuck at least temporarily with an open case. While the seller could enter contract with another buyer, the sale would have to be subject to the cancellation of the previous escrow. One sale can’t close as long as another is still open.

So, what’s the remedy? Now, it is really time to consult your attorney. Here is what the contract says:

If Buyer or Seller gives written notice of cancellation pursuant to rights duly exercised under the terms of this Agreement, Buyer and Seller agree to Sign mutual instructions to cancel this sale and escrow and release deposits to the party entitled to the funds, less fees and costs incurred by that party… Release of funds will require mutual Signed release instructions from Buyer and Seller, judicial decision, or arbitration award (emphasis added). A party may be subject to a civil penalty of up to $1000 for refusal to sign such instructions if no good faith dispute exists as to who is entitled to the deposited funds.

In this case, since the seller just wants to move on and the buyer is not performing, and since the buyer is refusing to sign cancellation instructions, we are left with the mediation/arbitration process or legal suit. I know — $1000 is not such an impressive consolation prize, but that is the contractual hammer.

There is a lot more to the whole breach of contract conundrum, of course, but to the one hearty reader who didn’t move on to the Huffington Post three paragraphs ago, call me and we can chat. We can start by discussing the importance of requiring a significant deposit from the buyer, not just one that was funded by the loose change in his sofa.

photo credit: smarthero

I know, I know. Based on our posting frequency lately, you thought we left town weeks ago. Blame that one on busy. Blame this one on, well, too busy for too long. We’ll be back toward the end of the week, hopefully with renewed enthusiasm and a vengeance. Until then, I am putting our three readers in charge of holding down the fort.

(Note: The photo I bagged from Flickr shows a first class cabin which clearly does not apply to us. A girl can dream, though.)

I’m shuffling off to show property this morning but, before I do, it seemed timely to share the CliffsNotes on the home buying activity we are seeing in Scripps Ranch. I predicted that we might see some declining sales numbers as we move past the longest day of the year. Maybe I was wrong. Or maybe my prediction was just premature.

This is the trendline for homes “under contract” (in escrow) in Scripps Ranch for the past year. The data is for both attached and detached homes. Seems to me that low inventory is not enough to keep a motivated buyer down. Homes in our little community continue to sell in an average of approximately 50 days, and the well-priced, well-prepared and marketed homes seem to be flying off the shelf.

This morning we only have 62 true active detached listings in Scripps Ranch (discounting the homes in “contingent” status awaiting lender approval of an offer), this for a community of approximately 8,000 detached homes. Good grief! We also have 60 detached homes tucked into escrow at the moment. Assuming that most stick, July may beat the May and June sales numbers yet. Seller pricing has gotten more realistic, and I believe this to be the biggest factor in the buying wind sprints we are seeing. And it doesn’t apply to just Scripps; I am seeing it up and down the I-15 corridor and in Sorrento Mesa where we have buyers currently desperately seeking homes.

So, now, I’m off to try to find something to show my buyer client this morning. Pray for me.

FHA spot approvals are on their death bed, and some lenders it seems are ready to prematurely pull the plug. Here’s the back story.

FHA financing, which has gained popularity with the demise of the low-down payment mortgage, requires in the case of condominiums that the projects be on HUD’s approved condominium list. Absent this, FHA financing has required in the past that either a blanket approval be obtained for the project or that the lender apply for a “spot approval” (approval for the single unit being purchased). The spot approval, while requiring certain requirements be met in order to obtain HUD’s blessings, has not proven an insurmountable undertaking during a 45-day escrow period. Plus, the level of difficulty is obviously less than getting the entire project approved, so the spot was a handy alternative for many FHA buyers and their lenders.

That’s about to change. George Souto wrote a good summary of yet another implication of the underwriting guidelines which have been changing as often as a mother of quintuplets. In short, HUD is proposing to streamline the FHA approval process for condominium projects but, at the same time, is eliminating the spot approval effective October 1, 2009.  That’s a bummer, but it’s not the big bummer.

If you are currently in escrow on a purchase for which your FHA loan has been relying on a spot approval, you may find the financing rug pulled out from under you. One of our agents this morning received word that financing for a client who is supposed to close escrow next week was just yanked, her particular lending having decided to play it safe and adopt the new policy in advance.

Since this was a completely new subject for me, I don’t know if the “just do it” approach of this particular lender signals a pandemic. But, if you are an FHA borrower in the throes of an escrow banking on spot approval, or an agent representing one, you might want to make a phone call.

We all read the reports about our local housing market. It’s up! It’s down! Yep, all that. And mostly, we have been talking about the numbers of sales lately, since few are arguing that prices are actually climbing, at least to the extent that they might suggest a trend.

We just survived a forty-eight hour period in which we closed five escrows. As agents, and buyers and sellers know, the final days of the real estate transaction are like the final minutes of a basketball game - that’s when all the action takes place. Loan document signings, utility transfers, wire transfers, and, in our case, ten moving trucks, give or take, all poised in various states of readiness. We have final walk-throughs, last minute signatures, and last minute attempts to find the remotes to the ceiling fans which, invariably, have been packed in the box marked “Chelsea’s Room” never to be seen again.

It’s glamorous, I confess.  And when we wake up to find that we have more or less survived one of these classic spurts - ours is always a business of ebbs and flows - we have some catching up to do.

I made a quick trip to the “Market Stats” pages of our web site to take a peek at the active listing inventory trends for San Diego County and the I-15 corridor this morning, and was irritated to find that no one updated the numbers for May. Heads are going to roll! Then I remembered. I’m the one who updates those numbers. Dang. I had better get cracking. Just as soon as I find a home for our newly relocated clients who are growing weary of life at the Residence Inn. Unfortunately, this is proving more easily said than done.

While I was busy having a little Spring escrow fling, something happened to the market. Our inventory went on sabbatical. I wrote recently about how so much of our active inventory wasn’t really so active at all, a lot of short-sales “pending lender approval,” and how these homes were rightly swooped into the netherworld of a new MLS “contingent” status. Contingent, of course, means “Not really for sale, so too bad for you.”  Consequently, we saw the active numbers take an overnight nose dive, but that’s only part of the story. Our real inventory is really shrinking.

Would someone please move? We are finding that we have nothing to show our buyers, and buyers are out there. Granted, they aren’t your 2005 buyers, the ones hurling blank checks at the poor homeowner who, on his way to take out the trash, simply looked like he might be moving because he was carrying big bags of stuff. Buyers still want value and, for many, value is defined as 1947 pricing, but there are as many more realistic buyers who finally see value in this market.

So what happened to the inventory? Well, people aren’t selling in the same numbers now that they were during the peak; that much is true. 2005 is still too vivid in the homeowner’s memory, and the want-to-move crowd is less inclined to bite the price bullet just yet, so we are left with the need-to-move folks. But we also saw much of the well-priced inventory get gobbled up seemingly overnight. The question is how much of this is seasonal?

I have no statistics to point to this morning (since “somebody” forgot to update them), so I’m going to rely on my feelings. It’s a girl thing. When the June numbers come out, we are going to see a surge in the number of closed sales, at least locally. And when the July numbers hit, we are going to see a decline in sales again, which will result in a lot of analysts assuming the freak-out, crash position. But you can’t close escrows when there are no homes for sale, so July sales numbers will not be indicators of anything.

I believe it is September and even October which will be key. Interest rates have been creeping, which has inspired many buyers to do their thing sooner rather than later. The first-time homebuyer tax credit will sunset this November (well, maybe). And, this Fall, it won’t be Spring anymore (duh).  It is then that we will see what consumer confidence is made of.

My prediction for San Diego housing? We have another year of volatility and continued downward pricing pressure, although the rate of decline will continue to wane. Next Spring will bring our base, at which point we will enjoy an extended stay in the land of normalcy - normal market times (measured in months, not hours), normal annual price appreciation (measured in single-digit percentages, not in numbers that sound like test scores), and normal expectations on the parts of both buyers and sellers. This is called equilibrium, and it will take one more Spring until we stop playing around.