Earnest Money in Purchase Agreements

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Earnest Money and its role isn’t always understood, so I felt it would be good to give a quick overview:

What it Is
Earnest Money is effectively a deposit by the Buyer that is offered at the time of the offer. 

How Much
Earnest Money is often 1% of the sales price, but can be significantly more or less depending on the situation.  A quick closing may need less cash, a longer closing more.  This is also a great way to show strength in a low offer as it shows a strong financial position and confidence in the transaction.

Where it Goes
Upon acceptance of the offer, the money is deposited into the listing broker’s trust account where it is kept until closing or until cancellation of the Purchase Agreement.  At closing, the money is credited back to the Buyer on the HUD-1 Settlement Statement.

It’s Purpose
Earnest Money is used to assure the Seller that the Buyer is serious about consumating the transaction and gives them consideration in the event that the Buyer does not complete the transaction, assuming that they did not cancel for reasons permitted in the contract.

How a Buyer can Lose it
If a Buyer cancels the offer due to problems from their inspection or from failure to secure financing, they almost always have their Earnest Money returned.  In condos and townhomes, a Buyer has 10 days from the date they received the association documents to review them and cancel the offer and get their money back if they desire.  If a Buyer gets cold feet and wants to cancel well after completion of an inspection, they may lose their Earnest Money.

Twin Cities Homes for Sale Under $190,000 Explode

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While the Twin Cities Market as a whole in December 2007 had approximately 10% more listings than it did in December 2006, this increase in inventory is substantially skewed towards the 1st time buyer side of the market.

Below you will find slides from the Minneapolis Area Association of REALTORS December 2007 Housing Supply Outlook.Housing Supply Outlook - Inventory by Price

When you look at the numbers, the largest increase in inventory is at the lowest end of the pricing segment.  We see that in just 12 months we’ve over doubled the number of homes for sale under $120,000.  Even $120,000-$150,000 saw a 56% increase and $150,000-$190,000 saw a 24% increase.  When you hit $190,000-$250,000, inventory is only up 2.5% and from $250,000-$1,000,000 inventory has actually shrunk!  The 10.5% increase in $1,000,000+ homes is such a small number of units (74) that statistically I don’t think its too significant to the market as a whole.

This is a huge contrast!  The month of supply has also increased, but not nearly as dramatically, as seen below:Housing Supply Outlook - Months Supply by Price Range

If you look closely at what’s happening in the above charts, you’ll find another trend that’s shown in this chart:Housing Supply Outlook - Sales by Price Range

Sales in the last 12 months have grown strongly on the very low end of the market (under $150,000) and have fallen at all higher price points.  Metro-wide, sales are down 16%+ so any increase in sales shows a segment clearly bucking the trend.

What does all this mean?  Though the subprime market is supposed to have hurt the 1st-time buyer market, the sales from 2007 show that buyers in this range are more active than they were in 2006.  Does this mean the 1st time buyer is alive and well???  I’d love to hear comments from the peanut gallery.

One thing I’d love to see is a distribution of homes in foreclosure on this price graph… it would be very interesting to see which price points have the highest foreclosures… are you reading this Jeff Allen? :-)

Mortgage Rates Tumble

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Over the last couple of weeks 30-year fixed mortgage rates fell substantially… I’ve seen some recent quotes for 5.5%!

Taking 1/2% off the interest rate (which is what has happened in the last few weeks) on a $300,000 loan saves you $1500 per year in interest charges, which would be a savings of $125 per month or is like taking nearly $21,000 off the purchase price of the house, as compared to the higher interest rate.

With record high inventory and affordability at 3 year highs, this is a great time to be a buyer!

Here are a couple loan officers that I recommend if you are looking for information on what you can afford, how mortgages work, or want to get a pre-approval.  Please feel free to contact them or myself if there’s anything we can do for you!

Nicci Brown – Edina Realty Mortgage

Cheryl Stuntebeck – Bell Mortgage

No consideration has been received for these recommendations.

Top 10 Reasons Why Countrywide is Being Stupid With REO's

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Time and time again, I see Countrywide Home Loans (CHL) listing their Real Estate Owned (REO) properties on our local MLS and requiring buyers to get pre-approved with a Countrywide Retail Loan Officer prior to submission of their offer.  In fact, in their required addendums, it is specifically noted:

If the Agreement is contingent on financing, as a sales condition, Buyer must obtain a pre-approval letter from a branch office of Countrywide Home Loans, Inc. (“CHL”) for a mortgage loan in an amount and under terms sufficient for Buyer to perform its obligations under the Agreement, and such letter must accompany the Agreement.  The pre-approval shall include, but is not limited to, the pre-approval letter, a satisfactory credit report, and proof of funds sufficient to meet Buyer’s obligations under the Agreement. Buyer’s submission of proof of pre-approval is a condition precedent to Seller’s acceptance of Buyer’s offer. Seller may require Buyer to obtain, at no cost to Buyer, loan pre-approval as Seller may direct. Notwithstanding any Seller required pre-approval, Buyer is not required to obtain financing from CHL or Seller- Buyer may obtain financing from any source.  As an incentive for the Buyer to obtain financing from CHL, CHL will offer a free appraisal and a free credit report if the Buyer finances and closes the purchase of the Property through financing from CHL.

This is ludicrously stupid for the following reasons (not a complete list):

  1. Most buyers are pre-approved early in the home search process and have already chosen a lender they are comfortable with and are ready to buy NOW.
  2. Most buyers do not want to share private information with a stranger.
  3. Most buyers have no intention of working with the Countrywide Loan Officer.
  4. Countrywide pulls credit, meaning another inquiry on buyer’s credit report.
  5. Countrywide’s lending capabilities (product options) have been dramatically reduced since they are doing mostly/only loans that Fannie Mae or Freddie Mac will buy.
  6. Agents have existing relationships with loan officers that they know, trust, and can count on… they don’t like to have an ultimatium put to them any more than a buyer and don’t like interference in their client relationship.
  7. Agents often have such a long list of potential homes to show that they need to find reasons to eliminate some… this is an obvious candidate for removal.
  8. Countrywide doesn’t care who the approval is from or how solid the buyer is… if they are using financing, they HAVE TO get a pre-approval from Countrywide Retail. Period.
  9. Offering to do a free appraisal on a home that they own is akin to having the fox guard the hen house simply because he’ll do it for free… where’s the buyer’s protection when the seller is the loan originator?
  10. And finally- buyers are not stupid and they know when they’re being jerked around.  With so much inventory on the market, they can choose to tell Countrywide to keep their property and they’ll go find someone else who won’t treat them like a fool.

According to the Countrywide Foreclosure Blog, Countrywide had 14,442 REO homes listed on their site as of 12/5/07 at a total asking price of just over $3 Billion.  With so much inventory, so much competition, such a difficult buyer market, and tough times keeping Countrywide financially afloat, you would think that they would want to do everything they could to get their properties sold!

Recently I have seen several of Countrywide’s properties in the $200,000 range price reduced $30,000 and $40,000 all at once.  Such drastic price reductions have generated interest in the properties but also shows the motivation, and possibly desperation, of Countrywide to get these houses off their books.  If they eliminated their pre-approval requirement, they might see more interest from qualified buyers without having to so drastically reduce prices.

Some people suggest that Countrywide requiring a pre-approval is smart business, that it gives them an opportunity to pick up the buyer’s mortgage.  I would be surprised if they had more than a 20% capture rate on these leads (but I have no knowledgewhat their capture rate is), and the added holding costs for longer sale, disinterested buyers, and further price reductions make me think that this is a losing battle for them. 

Message to Countrywide: eliminate your CHL pre-approval requirement.  You’ll sell more houses, sell them faster, and likely at a higher price.

Should Banks Convert ARMs into Fixed Rate Loans?

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CNBC has a great aricle titled: “Loan Modification Anyone?”

The article does bring up a good point… while saving buyers that are in danger of losing their homes is a good policy, going too far is not fair for everyone else and can potentially lead to more fraud in the market.  It’s amazing to see the differences in opinion and direction this market seems to be taking.

All I know is that they better come up with something… the foreclosure market continues to grow as a percentage of listings for sale on the MLS and that isn’t good for the long-term health of our housing market.

Minneapolis/St. Paul Median Home Sales Price Falls

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The October 2007 Median Sales Price for Twin Cities homes fell 3.5% from a year ago and 4.3% from two years ago, to $220,000.  The Median Sales Price is the price at which 1/2 of the homes sold for more and 1/2 of the homes sold for less.

While this sounds like negative news, pricing is all relative.  The only people who suffer in a falling real estate market are the downsizing & downpricing homeowners.  For those who bought in the last few years that are trying to sell today will see red ink on the sell side but will see savings on the purchase of their new home.  Most of all, first time buyers and move-up buyers are definitely winning in this market.

Minneapolis/St. Paul Housing Affordability Up 4.5%

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According to the Minneapolis Area Association of REALTORS newest figures, the Housing Affordability Index is up 4.5% in November 2007 versus November 2005, from a value of 132 in 2005 to 138 today.

While this is an improvement from much of 2006 and 2007, it is still substantially lower than the index’s record of 160, set in 2003.  The index’s low of 122 was set in 2006.

The Housing Affordability Index formula measures housing affordability for the Minneapolis/St. Paul market. An HAI of 138 means the median family income is 138% of the necessary income to qualify for the median priced home using a 20% down payment, 30-year fixed mortgage.

Foreclosed Homes Need Interior Photos

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I wrote in June about agents who still had snow pictures on the MLS.  Today I mention another thorn in my side: agents who represent bank-owned foreclosed homes that do not take photos of the inside.

In the Twin Cities, as in many other large metro areas nationwide, we have seen a sharp increase in foreclosures over the last year.  This has been a boon to the business of agents that work with the banks carrying this inventory.  Unfortunately, some of these agents are either too busy or feel they are getting paid too little to take the effort to snap interior photos of the house and also often do not measure room dimensions.  Sometimes the house’s interior is in bad condition, sometimes it is in remarkably good condition.  Either way, consumers want to see layout and general condition before they make the trek out to see the home.

When we have record levels of inventory on the market and many investors waiting on the sidelines, the consumer looking for a home for owner-occupied use is still the best buyer for most homes.  Since these consumers have so many choices, they narrow down their options using the photos and other MLS information provided online.  Fewer buyers seeing the home means less potential to sell the home quickly and at a good price.

Until banks wake up and demand the agents selling their inventory to do more to market the home, they will find that they are not receiving the full benefits of the MLS and are missing many potential buyers.