Entire feature films, websites and hour-long cable specials have been devoted to debunking urban legends, those modern fables that circulate at the speed of the internet. And real estate is not immune; modern-day myths of easy-peasy seller financing, distressed sellers practically throwing their properties at buyers, and cosmetic fixers that can be had for pennies are just that – fairy tales which, if believed, can result in some not-so-happy endings.
The real deal is that real estate is much more affordable than it used to be, but the barriers to entry are higher, and the days in which you could get something for nothing are over. Here are five real estate and mortgage urban legends, and the truth which lies beneath.
Urban Legend #1: Got bad credit? Get seller financing. Does seller financing exist? Of course. Is it as easy to get – or desirable – as they make it seem in the infomercials? Not even close.
Here’s the real deal: most sellers who have a mortgage they obtained in the last 10 years or so also have a due on sale clause which requires them to pay it off when they sell the property. Financing the sale themselves, vs. requiring the buyer to obtain mortgage or other financing to pay for the property, prevents them from having the cash to pay their mortgage off, as required. And the vast majority of those who don’t have a mortgage of recent vintage need the proceeds from the sale of their homes to buy their next home or invest in their next property.
What’s more, even the few sellers who don’t need the cash often don’t want to take on the long-term risk and hassle involved with having to collect payments from a buyer for 10, 15, or 30 years. The sellers who can and will agree to seller financing usually want a premium price and interest rate for it – and the smart ones will require some type of credit check and a deeper down payment than a traditional lender.
And seller financing, as sweet as it sounds, poses risks for buyers, too. If the seller keeps a bank mortgage on the property and fails to make the payment, the seller-financed buyer could end up losing the home they’ve paid for to foreclosure. Best targets for seller-financing are investor sellers who are looking to avoid capital gains, and best practice is to get a local real estate attorney involved in drafting and recording the transfer and financing documentation.
Urban Legend #2: Buyers save big bucks on cosmetic fixers. Sellers aren’t stupid – and neither are their agents. There might have been a day and time in which you could find listings that were deeply discounted because they needed a little cosmetic refresh. But those days are long gone – even in today’s down market, sellers expect to invest a little cash into paint and carpet to stage and spruce up their biggest asset and get as much as humanly possible for it. Today’s sellers also know that homes not in tip-top shape may not sell at all these days, so they go to great lengths to do make their homes shine. (And those who can’t afford to aren’t slashing tens of thousands off their homes’ list prices, though some will offer buyers a credit at closing.)
That’s not to say you can’t get a discount on a place that needs some work. But the meatiest discounts are on the places that need the most work; roof leaks, old windows and laundry-list long pest inspection reports are much more likely to get you a big price break than scuffed walls and grungy carpeting on a home in otherwise sound condition.
Urban Legend #3: 100 per cent financing for first-time buyers. Most of the national first-time buyer programs are mere figments of our collective mortgage memory. But during the subprime mortgage era, 100 per cent financing was available to pretty much everyone, not just first-timers. And the post-bubble first-time buyer programs tended to be tax credits that could defray some of the up front investment required to buy a home, rather than zero-down home loans.
FHA loans, which are extremely popular with first-time buyers, are available to any buyer who can qualify, whether or not they have owned homes before or own one now. Most of the state and local first-time buyer programs that still exist involve some level of down payment or closing cost assistance, but the vast majority also require that the buyer put some of their own cash into the transaction. The prevailing theory today is that homeowners who have put their own hard-earned cash into their homes are less likely to walk away from it later, whether or not they are first-time buyers. It has also become clear that the financial management skills and discipline it takes to save up for a down payment or closing costs are skills and habits that stand prospective buyers in good stead for the rest of their lifetimes as homeowners.
Long story short, while virgin homebuyers can and should seek out the assistance programs available to them (local real estate and mortgage pros often know the ins and outs), they should also tuck their pennies away and expect to have to put some of their own financial skin in the game.
Urban Legend #4: Nearly free foreclosures. We’ve all heard the line that banks don’t want to be in the business of owning homes. That may be true, but they are in that business, whether or not they want to be. As a result, they’re not giving houses away at pennies on the dollar. In fact, bank-owned homes, as a rule, must be sold at as close as possible to their fair market value. Banks and their Wall Street mortgage investors do this by exposing the property fully to the market, rarely accepting lowball offers, and only lowering list prices in fairly small increments after a listing fails to sell after 60 or 90 days (plus) at the pre-reduction price.
While foreclosed homes do sell for less, on average, than their “regular” sale counterparts, they are also often in worse condition. And banks are virtually always less negotiable on pricing, repairs and other terms than individual sellers. The fact of the matter is that some of the best deals on today’s market are to be had via negotiations with realistic owners of non-distressed properties who are ready, willing and able to make a deal.
Urban Legend #5: Distressed owners who will sign their home over to you, gratis. This one is fantasy of the highest level. First off, very few assumable home loans even exist anymore; most mortgage are due on sale, which means that new buyers have to qualify for and secure their own loans. Secondly, many mortgages that ARE assumable have much higher interest rates than today’s home loans. Third, most homeowners who are in a distressed position on their home are in that position because their home has declined in value and they now owe more on it than it’s worth, which stops them from pulling off a traditional sale or refinancing it at today’s lower rate.
Ask yourself: why would you, a buyer, want to assume a mortgage balance vastly greater than the property is worth, even if you could? It’s just not worth it, even if you think you’re getting a shortcut around the mortgage qualifying rigmarole.
Add to that the fact that many states have consumer protection laws dramatically limiting the sort of ‘bailout’ that is even legal to propose to a homeowner who is in some stage of the foreclosure process. In addition, many homeowners who have received foreclosure notices are in the process of trying to work out their distress with their lender or staying put without making payments as long as possible before losing their homes. These folks might be slightly miffed at your intrusion, to put it politely, if you ring them up, send them a note or knock on their door trying to pitch yourself (and your signature) as their mortgage distress solution.
Did you have any personal real estate urban legends that were debunked in the process of homebuying? Leave a comment, and share with us!