A Cautionary Tale: Lender Letters

A Cautionary Tale: Lender Letters

The Lender Letter

A Loan Commitment Letter is something that Buyers should get before they even start looking.  Some will meet with a lender, do a pre-qualification type of application so they know what they can afford, and the letter will follow shortly thereafter.  Regardless, it’s a must have when submitting an offer.  If I receive an offer without one, we always counter that Seller’s acceptance is contingent upon receipt within, say, 24 hours.

Even then, it’s not a slam dunk.  This is the “Cautionary” part:

Sometimes it’s really just a pre-qualification letter, because there will be conditions to meet before the lender will actually “commit” to funding the loan:  e.g., verification of income, verification of employment, review tax returns, verify source of funds, explain some adverse credit item, etc.  For this reason, you will want to call the lender and ask a few questions.

Here’s what I like to know:  Did the lender run a Tri-Merge Credit Report (3 reporting agencies) or an in-file (just one agency)? What verifications have been completed, and what conditions need to be met before sending the file to underwriting?  There almost always are some, and usually the lender has already figured out what they need to satisfy them. Just ask.  How long is it taking to do an appraisal?  This will tell you if the dates in the Contract (loan approval, closing) are realistic.

Believe it Or Not – a True Story

So, we listed a beautiful condominium, and received an offer including a very positive letter from a lender (located in CA).  The Buyer, while mostly retired, had several income streams, plus enough savings to pay cash for the property if necessary.  This was all very reassuring, and I spoke with the lender who said everything looked great, subject to verifications.  No big deal, so we all signed a contract.

Then this happened:  during verification of income, it turns out that one of the income sources used for the pre-qualification had ended several months earlier.  Now the buyer no longer meets the ratios to qualify.  And since the contract was contingent on financing, we receive notice from the Selling Broker that the Buyer is going to have to terminate the contract.  Shouldn’t someone have known about this earlier?  You’d think so, but too late now. Can we keep the earnest money? Doubtful.  There’s nothing in the Colorado Real Estate Contract that explicitly protects the Seller against this kind of eventuality. Sometimes these things happen in spite of all the due diligence.  

How We Fixed It

Actually, the Lender pulled this one out of the fire. Since the Buyer had lots of retirement savings, they were able to set up distributions from a 401k to replicate the missing income. Did you know you could do that? Here’s a good article on  How A 401k Works After Retirement.

Pretty slick.  I knew you could use a lump sum from a 401k to buy a house, but this is the first time I’ve seen this approach. The Buyer qualified and we closed the transaction.  All’s well that ends well, but this Broker (and his Seller) was mildly traumatized.

Lessons:  When choosing to work with a Buyer who needs financing, make sure they’re really pre-qualified or pre-approved.  Know the difference, and talk to the lender about where things stand right now.  Make the Loan Approval Deadline as soon as possible, but realistic, based on what you know about how much time is going to be needed for loan processing and underwriting (usually several business days after conditions are met, appraisal is done and file is complete). These are the things you can control, so make sure you do.

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December Market Trends

Denver market shows signs of slowing, but only slightly:

Winston Downs market

Keep in mind that in an overheated market, a “slowdown” might just make it a good market (for Sellers).

You can calculate an “Absorption Rate” by dividing the Active Inventory (7,530) by the monthly sales (3,732) = 2 months.  Friends, that is still a really good absorption rate (3-6 months is “normal” . . . ).  

Average and Median prices haven’t changed that much, and it could just reflect where the activity is in the marketplace, e.g., fewer high-end properties were sold.  

That increase in Avg Days on Market (6.9%) is only 2 days . . . so no big deal.

Bottom line:  still a Seller’s market; When pricing a home for sale, scrutinize the comps and make honest adjustments for condition and location.  React quickly (30 days) if you decide it’s overpriced.

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2018 Sales Data

2018 Sales Data

The year isn’t quite over yet, but I have some time now (Dec 4) and will try and update after the first of the new year.  Here’s what has happened in Winston Downs in 2018:

There were 31 Home Sales in 2018.  That’s about a 5.5% annual turnover for the neighborhood – a pretty low rate historically (about 10% might be considered average in most markets). Makes sense based on the low-inventory status of our Denver housing market.

Of those sales in Winston Downs, 81% were Ranches.  The average ranch-style home was 1,923 sq ft, had 4 Bedrooms and 3 Baths with a 2-car garage, on a big 9,800 s.f. lot.

Before receiving an offer on their home, 45% of Sellers had to make a price reduction in 2018.  The good news:  a typical Seller received 98.1% of the final asking price. This probably reflects 1) some resistance to pricing from Buyers, 2) overly-optimistic pricing from some Sellers, and 3) the increasing impact of adverse conditions (e.g., busy streets, deferred maintenance, floor plan, etc.) on value in a slightly cooler market.

After a home was listed for sale in Winston Downs, it took an average of 37 Days to go under contract. That’s still an impressive number, historically.

The average sold price was $623,138.  Wow.

Based on information from REcolorado®, Inc. for the period 1/01/2018 through 12/04/2018. Content maintained by REcolorado® may not reflect all real estate activity in the market.

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Average Home Price

Are we seeing any decline in Denver home prices? 

Not yet.  At this writing, we’re seeing some seasonal slowdown – fewer showings – and that may have a temporary affect on pricing.  

Inventory is up

This could impact prices, too, but if you think about it historically:  remember that Denver had over 20,000 active listings for much of the 1980’s.  

Even if the supply gets all the way back to levels of 5 years ago, there’s still a lot of demand.

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The Benefits of Home Staging

Property staging is “intelligent merchandising.”  This is the process of analyzing the property, maximizing the “equity” and minimizing the excuses a buyer may use to discount or eliminate the property from their A-list.  It’s not decorating, but rather presenting the home in such a way that emphasizes and reveals the benefits (equities) of the property without distractions.

Over 96% of Brokers say that buyers are affected by home staging

staging, Winston Downs

Bedroom before and after staging

Staged properties are twice as likely to receive full price or more

kitchen, staging, winston downs

Kitchen before and after staging

Staged properties sell 76% faster 

living room, staging, winston downs

Living room before and after staging

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Selling your Home: step-by-step

Selling your Home: step-by-step

Some things change fast in real estate: markets go up and down, contract language is updated, mistakes and lawsuits give rise to new regulations and rulings.   But other things remain the same, year after year.  Here are the things our Colorado Department of Real Estate (DORA) wants you to know about the process of selling your home:

Determine goals or outcome: Once the decision to sell has been made, a number of other questions come to mind. What is a fair price under the current market conditions? What are the current market conditions? How can the property be marketed most effectively? How long will the process take and how should I proceed with future plans? Who will be able to help with contract and closing requirements? Some sellers have the experience and expertise to answer these questions, many others would prefer professional assistance from a real estate broker and/or an attorney.

Interview and select a broker: The process for selecting a broker is described in the section titled “How to Select a Real Estate Broker“. As a seller, pricing and marketing issues are very important. Everyone wants to make sure they get the best possible price and terms. Proper preparation will assist you in reaching that goal.

Competitive Market Analysis: The brokers that you interview will want to take a careful look at your property in order to gather information to help them estimate its value. This estimate is not an appraisal, but a competitive market analysis. This is a tool that will allow you to compare your property with similar properties recently sold and currently on the market.

Marketing Strategy: Newspapers, yard signs, open houses, internet, multiple listings service? How should your property be marketed? What kinds of advertising really pay off? What works for sellers in my price range? A broker who knows your area will be able to help you devise a marketing plan based on previous successes.

The Listing Agreement: The listing agreement is the written contract whereby a property owner hires a real estate broker to market real property and provide services. A listing contract describes the property ( address and legal description), the listing price and the terms that are acceptable to the seller. The listing also outlines the compensation that the broker is to receive. A listing may specify a percentage of the selling price, a flat fee or any other negotiated agreement mutually acceptable to the parties (the seller and the broker are the parties to the listing contract) as compensation to the real estate broker. Colorado brokers are required to use listing contracts approved by the Colorado Real Estate Commission.

Preparing for a Showing: Your broker can give you good advice about how to prepare your property for showing. Common sense applies, but a trained third party observer can help you to make the best possible first impression on prospective purchasers. A thorough clean-up, a little fresh paint or minor repairs can help show your property in a favorable light.

Counteroffers: An offer to purchase made by a prospective buyer has no limits on what price or terms it may contain. An offer that mirrors the listing’s asking price and terms may be common under certain market conditions, however, from a purchaser’s point of view, it may represent a minor issue in a search for an exceptional value. A licensed real estate broker is required to submit all offers regardless of it’s terms. The seller always has the option of accepting or rejecting an offer that does not meet his or her requirements. If the terms do not meet with the sellers approval, a counter offer may be utilized as an attempt at compromise rather than dismissing what might be a qualified prospective purchaser.

A Commission approved “Counter Proposal” form is used to modify the terms of an offer to purchase. Once a counter offer is made, the terms of the original offer have been rejected and the seller proposes new terms. The original purchaser then has the option of rejecting or accepting the new terms.

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