Mood of the Market

Tara-Nicholle Nelson
Inman News

I love Tim Burton films. That a single director’s filmography includes "Beetlejuice," "Edward Scissorhands," "The Nightmare Before Christmas" and the disturbingly delightful-looking "Alice in Wonderland" is absolutely amazing.

I crave to know what it looks like on the inside of Tim Burton’s head. If what comes out of there is any indication, I suspect he lives in a totally different reality than the rest of us — one of swirly, brilliantly colored gorgeous/grotesque beings that are certainly not of this planet — among plants, buildings and even machines and buildings, that bear only a whiff of a resemblance to the material of the world in which you and I live.

While Tim Burton’s creative genius might be unparalleled in the world of film, in the business of real estate he certainly has challengers for Best Resident of a Fantasy World: sellers.

Yep, sellers are Tim Burton.

Lest you think I’ve gone madder than Johnny Depp’s Mad Hatter, allow me to explain. Some sellers resemble Tim Burton in one key respect: fantasy. They live in a magical fantasy world where anything is possible (like, their home appraising at 40 percent more than the identical home next door that sold 10 minutes ago).

It’s a world populated by mythical creatures, like the well-qualified cash buyer who finds the cat pee stains on your hardwood floors to be a charming touch reflecting your love of animals, and is willing to pay you tens of thousands of dollars more than any comparable home in the area just to help fund the downpayment on the seller’s next home.

I work with more buyers than sellers, so sellers’ fantastical thinking is more apparent from the other side of the home-viewing-and-negotiating table where I sit. But buyers can be Burtonesque, too.

When they think, because they’ve heard it’s a "buyer’s market," that sellers will be greeting them at the doorway with offers of foot-washing and orchid leis, offering to sell them their homes for less than they (seller) paid and less than they (seller) owe, buyers are dwelling in Tim Burton-style fantasy.

When they totally ignore the recent comparables and sales data documenting what a home is worth, and make wildly lowball offers — and expect a seller to take them? When they think that they have weeks to sit and get really comfortable with the idea of making an offer on the "perfect home at the perfect price," when comparables sell in a day or two? That is buyer Burton-ism at its best. I mean, worst.

Now, it’s one thing to know what you can afford or want to pay and be firm, knowing that you may or may not get the property, and being totally comfortable taking that risk. But, to be righteously indignant that investor sellers should want to make a profit by selling a home at a well-supported fair market value, because you "don’t like" the idea that they bought it so low (before investing thousands adding the touches you love, but could never afford to add)?

To be totally outraged and angry at your home’s listing agent because the too-high price you set against their advice, combined with the too-cluttered and too-dated appearance of your home (also against the agent’s advice), is getting no offers and bad buyer feedback?

Fantasy. Land.

While the Tim Burton analogy frames this conversation with a humorous, lighthearted cast, let’s get serious here. These real estate fantasy lands are dangerous. For Tim Burton, fantasy pays — in fact, it’s his stock in trade.

For buyers and sellers in the real estate market, on the other hand, fantasy costs. It can cost you tens of thousands of dollars. It can cost you your dream home. It can certainly cost you your sanity and peace of mind in terms of creating regrets you deal with for many moons after your transaction is over.

The conventional wisdom among brokers and agents (which has been proven many times over) is that a property priced correctly out of the gate can generate multiple offers in almost any market climate.

Homes listed too high simply sit on the market, and while one price reduction strikes most buyers as an indication that a seller is willing to deal, obviously overpriced homes that fail to course-correct and lag on the market unsold cause buyers to speculate that something might be wrong with the home and/or the seller.

There is virtually no agent among my colleagues who hasn’t experienced or witnessed a perfectly saleable home that ends up sold below its fair market value because it was overpriced for overlong. Attention sellers: Fantasy costs.

Buyers who insist on looking only at bizarre, irrelevant sales data in an effort to support their lowball pricing, or who otherwise evidence Burton-inspired buying practices, often end up losing their "dream home" to other, more realistic buyers.

They may miss the peak of favorable market dynamics and incentive deadlines (or funds availability for first-time-buyer programs); or lose their minds from exhaustion, frustration and depression with their fantasy-based attempts to make a square house fit into their mental round homebuying frame of reference.

What’s behind this fantastical thinking? Well, some buyers and sellers allow their attachment to their wants and desires, their fantasy "after" picture of their life, to blind them to the real estate reality.

Others can chalk it up to the nature of homebuying and selling as a hybrid business transaction/lifestyle transformation — that makes it extremely easy for both buyers and sellers to overindex on the emotional investment in the transaction, sometimes unfortunately resulting in an under-attention to the cold, hard facts about their home and the market.

I’m a huge proponent of holistic homebuying and selling, with attention to all the impacts — not just the financial ones — on a buyer or seller’s life. But to err on the side of overemphasizing the lifestyle to the exclusion of the actual, unbiased data handicaps buyers and sellers, and costs them big time.

My advice? Listen to your agent. Read the numbers he or she gives you — and take them seriously. And go see a Tim Burton film. Don’t be a Tim Burton.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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Home Sale Hindsight

Tara-Nicholle Nelson
Inman News

Q: I filed for bankruptcy in 2008 and then lost my job in 2009. I’d like to keep my condo and my car, even though those debts were included in the bankruptcy. If I can sell my condo for more than its payoff amount, can I keep the money or do I have to pay it back to the bankruptcy court?

Second, if I am not able to sell the property and it goes into foreclosure, am I still responsible for the mortgage? Will there be attorney fees, etc., that I will be responsible for?

A: One thing about bankruptcy is that it is a tool that can be used only very, very sparingly. In most cases you must wait six years after one discharge to file again. So, you find yourself in a Catch-22 now, where you can’t file again but also can’t pay your bills.

I’ve certainly had clients who were in a financial bind hang on and put off filing to have some alternative to turn to in case their jobs went south. But I’ve also had others, like you, who filed, lost their jobs and wished in retrospect that they’d toughed it out and reserved bankruptcy as an absolute last resort. You live and you learn.

The answer to many of your questions is, "It depends." The implications of selling your condo at a profit or losing it to foreclosure depend on (a) under what chapter of the bankruptcy code you filed, and (b) what state you live in.

Chapter 13 bankruptcies are essentially just a three- to five-year repayment plan, so your discharge probably has not even occurred yet, if that is the flavor of bankruptcy you elected.

If you filed under Chapter 13 of the bankruptcy code, you were probably ordered to provide the bankruptcy trustee with your tax returns for the duration of the repayment period, and to report to the trustee if your gross income increases by more than 10 percent of the amount you reported at filing.

Selling your home at a profit is an increase in gross income, and must be reported to your bankruptcy trustee. And, yes, chances are good that the trustee will seek to capture that income (profit) for your creditors, unless an exemption applies. Talk with your bankruptcy attorney to get clear on what your likely outcome would be before you put your home on the market. If your bankruptcy was a Chapter 13, your case is still open and the trustee will actually have to be involved in the sale of your home.

If you filed for bankruptcy under Chapter 7, you are required to report changes in your financial circumstances, including income, that occur within 180 days after your case was filed, not discharged. Based on a 2008 filing, if you filed a Chapter 7 bankruptcy you should be fine, even if you sell your home now for more than your payoff. But, again, talk with your bankruptcy attorney before you move forward.

In some states, known as "recourse states," the law does allow lenders to foreclose on a home and still sue the defaulting borrower for the difference between what was owed (including legal fees the lender incurs to execute the foreclosure) and what the lender is able to sell the home for.

A few states require lenders to choose a single lawsuit against a defaulting borrower; they can foreclose, or they can sue you, but they can’t do both. Mortgage banks’ preference in these "one action" states is almost always to foreclose, so they can at least have the house to sell off and recover some of their losses.

Other, "nonrecourse" states prohibit lenders from pursuing the borrower after they foreclose on the home that secured the mortgage. In reality, most lenders today are not pursuing borrowers after they foreclose on homes, primarily because (a) litigation costs money and (b) most homeowners who have lost their homes are what we call judgment-proof (aka "broke" — they have no assets for the lender to recover against).

If it looks like you’re going to lose your home to foreclosure, it might be worthwhile to consult with a local real estate attorney and an accountant so you can get a truly accurate sense for what the tax and legal ramifications of foreclosure will be, customized to your personal situation.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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REThink Real Estate

Tara-Nicholle Nelson
Inman News

Q: I’ve been looking for my first home for several months now. In my price range, it seems like there are fewer and fewer good homes available. When I first started looking, there were lots of houses, although they were hard to get because so many buyers would be trying to get them. Now, it seems like the same beat-up houses that no one wants are pretty much all that there is, and every once in awhile a good one comes up and sells really fast. I’m getting frustrated, and sometimes I even think about giving up. Is this all in my head?

A: Nope. Pickings, my friend, are slim. I’m no oracle, so I can’t say I know why inventory is so gnarly, but it is. This is one of those nuanced things that you can’t tell from the data — the market update numbers in most areas show plenty of homes on the market, but the reality is that much of what is out there in the entry-level price ranges is less than desirable.

Not only do the numbers of homes on the market not reflect what’s going on, neither do the days-on-the-market statistics. The less-fabulous homes stay on a really long time, but the great houses that come on the market fly right off. These extremes cancel each other out, requiring a more sophisticated approach to the data, if you want it to be meaningful or usable at all in your decision-making.

Mindset Management

It’s time to press your mental rewind button and refresh your memory as to why you decided to buy a home in the first place. What was the vision you had for your life as a homeowner? More room for the kids? The ability to entertain in style? Were you motivated to break in at a time that, as tough as it may be, is quite favorable for buyers, relatively speaking? When you get frustrated or think about giving up, you should go back to your original motivations.

If they inspire your passion sufficiently, they’ll help you power through your frustration. If they aren’t very inspirational, then you might not be far off in deciding to wait and circle back to this later: Buyers who aren’t very motivated or don’t have a strong sense of urgency are unlikely to just fall into a place that they love on today’s market. Homebuying is hard work these days.

However, if you do decide to give up or wait, be very aware of what you may be giving up. There’s a lot of debate about where prices and foreclosure trends are going in the near future, but there’s consensus that interest rates are going up and lending guidelines are getting even tighter.

Also, the homebuyer tax credit is not long for this world. A decision to give up could very well be a decision to forfeit all of these pro-buyer market conditions.

On the other hand, if you decide to move forward, it’s equally important to get a handle on your wants and needs, and be more aggressive about compromising on things that aren’t really must-haves and deal-breakers. Get and stay clear on what you truly want and need and perhaps be a little more open to fixing — plan to use your tax-credit funds to do the painting, carpeting and other cosmetic finishes that can reveal the diamond in the rough.

I have a number of clients in similar situations. I see them grow more and more concerned and impatient when they can’t find any houses that work for them, then still hesitate before making offers on the places that would fit their needs. If that’s you, here’s my advice: Don’t hesitate.

When you see a place that would work for you, make an offer — decisively and quickly. And don’t pinch pennies or agonize over a thousand dollars one way or the other — be aggressive in your timing and your pricing, and you’ll have a much better chance of success.

Need-to-Knows

If you’re wanting to be aggressive without overpaying for a home, make sure that you and your broker or agent work through the statistics in an intelligent way. When you analyze comparables, look at homes that are very similar to your desired home — not just in location or specifications, but also in curb appeal, upgrades and general level of appeal. For those homes, get clear on their list-price-to-sale-price ratio: How much did they sell for compared to what they were listed for?

This can help ground you in reality — helping create a comfort level about offering more than asking and also a wise boundary so you don’t offer too much — when it comes to getting aggressive about making an offer on a great home, when one comes on the market.

Action Plan

1. Revisit your motivations for buying in the first place and either recommit to the process or move on, with a full understanding of what you are giving up.

2. Be decisive and move swiftly to make a strong offer, when you find a place that would meet your needs.

3. Be ready to compromise, and plan to put your tax-credit money to use bringing the cosmetics of your home in line with your vision.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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Law of the Land

Tara-Nicholle Nelson
Inman News

In the case City of Waco v. Debra Kirwan, et al., college student Brad McGehee was sitting on a bluff in a park owned and operated by the city of Waco, Texas, watching boat races when the rock beneath him crumbled and he fell to his death. At the time of his accident, McGehee was sitting in an area beyond a wall on which a sign was posted by the city that read, "FOR YOUR SAFETY, DO NOT GO BEYOND WALL."

McGehee’s heir and representative, Debra Kirwan, filed suit against the city, claiming that the city was grossly negligent in not warning park patrons specifically of the risk of fatality from falling rocks, and in even allowing patrons to access the area at issue, given that prior injuries and fatalities had occurred there.

Under Texas’ recreational user statute, if the city owed a duty to warn recreational users of a dangerous property condition, then the user must meet a heightened burden of proof, demonstrating the government’s "gross negligence, malicious intent or bad faith" to support a premises liability case. If there was no duty to warn, though, the city would be immune to suit and liability under the Texas Tort Claims Act.

The trial court found that the city was immune to suit, because it could not be found grossly negligent for failing to warn park-goers of an "inherent danger of nature."

On appeal, though, this ruling was reversed. The appellate court held that "the recreational use statute permits premises defect claims based on natural conditions as long as the condition is not open and obvious and the plaintiff furnishes evidence of the defendant’s alleged gross negligence," and ordered Kirwan’s case to be heard in full to determine whether the city’s conduct rose to the level of gross negligence.

The city appealed the matter to the Texas Supreme Court, which reversed the appeals court’s ruling and dismissed the case. The court explained that the city could be liable or found grossly negligent in this case only to the extent that it owed McGehee a legal duty.

The court weighed numerous factors in deciding whether the city owed McGehee any duty. First, a cliff is foreseeably dangerous to both landowner and user, the court explained. Second, the inherent danger of a cliff’s edge is significant, not something a reasonable user would take lightly.

Finally, the court opined, requiring a landowner to look for every potentially dangerous natural condition and either warn visitors or render the condition safe would be "generally unreasonable and unduly burdensome."

Accordingly, the court ruled, under the recreational use statute, a governmental landowner does not owe a user the duty to warn them of inherently dangerous, naturally occurring conditions.

Additionally, the court emphasized, the city’s actual behavior was in fact not grossly negligent, in that the city had taken pains to construct a wall blocking park visitors from accessing the dangerous area and a sign warning that it was unsafe for visitors to go beyond the wall.

For these reasons, the Texas Supreme Court found there was no reason to waive the city of Waco’s immunity, and the appellate decision was reversed. Kirwan’s case was dismissed.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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Book Review: ‘Living Well with Bad Credit’

Tara-Nicholle Nelson
Inman News

Book Review
Title: "Living Well with Bad Credit"
Authors: Chris Balish and Geoff Williams
Publisher: Health Communications Inc., 2010; 192 pages; $10.36

Once upon a time, it was the case that you could pretty accurately assume that if someone owned a home, they probably had at least decent credit. These days, that assumption is inaccurate more often than not.

So many homeowners have either lost homes to foreclosure, off-loaded them via short sales, filed for bankruptcy, gone late on mortgage payments to qualify for a loan mod, or fallen behind on credit-card payments so they could make their mortgage payments.

As a result, many, many homeowners of my acquaintance have taken some sort of credit hit in recent years.

Credit repair programs abound, but it’s tough to tell which are legit and which are scams.

Into this mix enter personal finance journalists Chris Balish and Geoff Williams, with their new book "Living Well with Bad Credit: Buy a House, Start a Business and Even Take a Vacation No Matter How Low Your Credit Score."

The authors nail the art and science of living a good life in the aftermath of credit trauma, with this soothing, pragmatic and deeply reality-based instruction manual, starting with an introductory chapter on how to move away from the psychological fear and depression that so often seizes new entrants to what they call the Land of Bad Credit.

While making clear that bad credit is truly undesirable, the authors set the stage for living well if you end up with it anyway, by declaring up front that having bad credit does not make one a bad person (contrary to surprisingly popular belief) and sketching out the various scenarios that frequently send good folks into the Land of Bad Credit.

After mentioning several potentially profound upsides (yes, upsides!) to having bad credit, Balish and Williams proceed to provide sound advice and very realistic action steps on banking with bad credit, including such well-supported advice as minimizing automated withdrawals and avoiding payday loans.

The next topic — getting a good job with bad credit — is essential reading for many job applicants, given that (a) credit checks are widely touted as being routine background check requirements for "good" jobs, and (b) a good job is pretty necessary to digging out of the financial dilemma that led to the bad credit in the first place!

Balish and Williams halt the potential for a "can’t get a job" mental freak-out in its tracks, with data showing that, in fact, the majority of employers still do not check credit.

They also offer insights from a headhunter with insider knowledge of employee credit checks from an employer’s perspective, and a job hunter who was able to land a high-level job after disclosing his credit issues, as well as useful tips for discussing your credit "issues" with a prospective employer.

Balish and Williams move on to provide uber-useful advice on getting good housing, obtaining transportation, starting a business and just plain old good living — including traveling, completing home renovations, gardening and getting good health care — all with bad credit.

"Living with Bad Credit" concludes with chapters on avoiding credit-repair scams and the psychological implications of having bad credit — with tips on dealing with depression and discussing money matters with partners and children — and getting back your good credit, then keeping it.

"Living with Bad Credit" is a bright light for people who have been through a dark period. It powerfully removes the dread of the phase of life that must inevitably be lived during the recovery of credit and finances after major money trauma.

It is full of highly relatable self-disclosure, little steps to make daily life with bad credit easier, and resources that cost little or nothing but hold the potential to decrease bad credit drama. "Living with Bad Credit" is an absolute must-read for anyone seeking to emerge from money problems and credit-related post-traumatic stress disorder.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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Mood of the Market

Tara-Nicholle Nelson
Inman News

I went house hunting with a client yesterday let’s call her "Alice." Alice’s particular homebuyer neurosis is "closet" post-traumatic stress disorder (PTSD). And she’s not at all in the closet about the fact that she has it — in fact, to the contrary. She’s extremely clear — in her head and with what comes out of her mouth — that ample closet and storage space is a must-have in her home-to-be and, by inference, the lack thereof is a deal-killer for her.

Alice currently lives in a duplex that is very nice, private and in a great area, but has virtually ZERO closet space. This is a problem, for a gal who I have never — I repeat, NEVER — seen repeat an outfit. She’s young, single, makes a great living and has a great figure, so she has, let’s just say, embraced her inner clotheshorse.

The result? Her bedroom is always a mess. Not dirty, but messy, because she has dramatically insufficient storage space. The No. 1 rule of feng shui is that old adage: a place for everything, and everything in its place. But following this rule of thumb is impossible if there is no place for all of the things!

Could she downsize her collection of stuff? Sure. And she probably will, as she’s actually an orderly person by nature, and fiscally smart, so I know she will not want to spend a single cent moving a single unneeded or unwanted item. Nevertheless, she knows herself well enough at this point to know that to live out her Vision of Home — including the vision of a totally orderly, fabulously organized home with a place for every loafer and every miniskirt in its place — she’ll need to set herself up for success by ensuring that she picks a place that has either huge closets, or supersized storage, or a plus room that can be used as a closet … or something.

I work with a lot of well-dressed women, so this is certainly not the first time this exact issue has come up. In fact, there’s a recent article in the New York Times real estate section in which a couple of single, women house hunters express the challenges of finding either "closets together with prewar charm and personality," or sufficient closet space in newly constructed units.

One such woman cut straight to the chase: "Why would you build a new condo with only two closets? Just because you are across the street from Manhattan Mini Storage does not mean you do not need more storage."

In fact, it’s likely that in this era of conspicuous frugality, the opposite is true. Want to get inside the mind of a homebuyer? Then understand that when she selects a home, she is often looking for a place that will eliminate the need for any other real estate rental fees that she is currently paying.

This is not limited to just the rental on their home, but parking space fees, storage spaces — the ideal home is one that obviates the need to pay for additional space: period.

And this issue is not just a woman’s issue. Couples actually have more collective stuff, and so need more collective storage. The husband of a house-hunting couple I toured with this weekend exclaimed with delight when a place had garage space sufficient to park both his car and his Total Gym.

Storage and closet space are primary dealmakers and -breakers in homebuying, and are especially attractive or deterrent at the extreme ends of the spectrum.

It’s not just about sticking your junk somewhere, but in those wished-for closets live a buyer’s vision of living an orderly life where before there was disorder. Of course, for some, it’s about a "hoarderly" life, but that’s neither here nor there.

Closet space promises the grown-up, sophisticated ability to own more stuff than is strictly necessary for day-to-day survival, like, as the New York Times article mentioned, suitcases, cleaning supplies and ironing boards.

If you’re a buyer finding lots of dream homes that lack only for storage space, or a seller hoping to overcome closet deficiencies in your home’s sale, here are some solutions and alternatives I often suggest to my clients who are hunting for a house that cures their "closet PTSD":

Supplemental Storage: East Coasters and people who love old homes can’t imagine disliking a home just because of its closet space (or lack thereof). They would just buy furniture for additional storage — whether you go to flea markets, Craigslist or Ikea, there are tons of "pieces" you can buy to create additional storage. On the Ikea end of the spectrum, there are even pieces you can install flush against the wall to look built-in, without spending more than you put down on the house.

The Closet Room: This is my personal preference. One of the luxuries of living in a home you own is that, if you have a room to spare, you can use the entire room as a closet/dressing room. You can make the investment to hire a company that customizes closets and have them line the walls with design-your-own shoe racks, sweater cubbies, short and tall rod/hanging areas, and purse cabinets.

Or, you can take the more frugal and arguably more luxe tactic of lining the walls on your own with rolling racks, dressers, a vanity, etc., leaving space in the middle of the floor for The Ultimate Holy Grail of Homeownership: the ability to leave your ironing board standing open without it being an eyesore or obstacle. All day long. Every day.

Hog, I mean, USE, all the closets: The best closet-relevant implication of single living is that every single closet in the house belongs to you! All the bedroom closets. All the utility closets. The linen closet. The broom closet. Those little tiny closets with the built-in ironing boards. All of them!

Blow it out: If you’re buying a home worth several hundred thousand dollars, minimum, and the deal-killer is that the closets are too small, perhaps it might be worth the $500-$2,500 it might cost to extend, enlarge or even relocate your closet(s). Most often, this just involves pushing one wall out a few inches and maybe some fixes to the flooring you disturb.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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Home Sale Hindsight

Tara-Nicholle Nelson
Inman News

Q: I’m about $150,000 upside down on my house, and I have been trying to do a short sale. I had a contract to sell it to a buyer who is well-qualified and has been waiting patiently for several months while we awaited approval from my mortgage lender. (I have two mortgages, with two different lenders.)

Anyway, we got an approval on the first mortgage, but on the second mortgage they refused to allow the short sale with anything less than 30 percent of what I owe them. The first mortgage lender refused to sign off on the short sale, though, if the second lender got more than a flat $5,000. This left about $15,000 between the two, and my agent couldn’t break the impasse.

I don’t understand this — I’m on the verge of foreclosure, and my second won’t get anything if I lose the house, because my negative equity in the place is more than I owe them. What am I missing here? Was there anything we could have done differently?

A: If I had a dollar for every time a thwarted short-sale seller, baffled by the banks’ collective refusal to play ball, asked me what they were missing, I’d be a rich woman, not a real estate columnist. Recently, though, a valid (yet unhelpful) answer has emerged.

What we’ve all been missing is the impact of private mortgage insurance coverage (PMI), which is to offer banks — especially second mortgage lenders — an opportunity to recover their total loss if they refuse to allow a short sale and you lose your home.

PMI works to cover a lender in the event their borrower defaults on their loan. However, most of us understood PMI to be a policy that is obtained by first mortgage lenders on loans greater than 80 percent of the borrower’s loan-to-value ratio. That just means that we always thought of PMI as something that a lender required only when there was a low- or no-downpayment loan involved.

And we all believed that using two loans to purchase your home, where the second loan stood in for your downpayment (e.g., an 80/20 or 80/10/10 loan scenario) avoided PMI altogether.

In fact, these scenarios govern only whether a borrower is required to pay for his or her own policy of PMI on top of the normal mortgage loan interest and fees. In reality, most (if not all) lenders obtained PMI on their entire portfolios of loans, including even "regular" 80 percent mortgages and on the second mortgages they originated and serviced as home equity lines of credit (HELOC) or downpayment substitute loans.

They didn’t charge borrowers for these PMI policies as a separate fee, although I’m certain that the cost of the PMI was factored into the other fees and costs of the loans.

Accordingly, what you’re missing is that the second lender is really unmotivated to take a lowball recovery like the $5,000 it would get if it agreed to the short sale on the terms set forth by the first lender, because the second lender might very well be able to recover 100 percent of the loan amount if you lose the home to foreclosure and it files a claim with its private mortgage insurance company.

As an aside, this might also be why so many lenders are failing to pursue deficiency judgments against their borrowers, after foreclosing on their homes. Why go to the expense of trying to litigate blood out of a foreclosed owner/turnip, when you can simply collect your loss from an insurance policy?

Now, in terms of what you might have done differently, the most experienced and sophisticated short-sale agents are evolving strategies to work around this issue as we speak. This is a very rapidly developing area, though, and there are absolutely zero guaranteed ways to secure short-sale approval.

Every situation is different, so while I can suggest some things that might have worked, there’s no way to know whether either of them would have done the trick.

This gap between the first and second lenders’ bottom lines can be resolved only by what we call a contribution. That means either the seller or the buyer must make a cash contribution to pay the second off. (If you simply get the buyer to increase the purchase price and finance the contribution, the first lender will want to take that increase, too!)

Now, many experienced short-sale agents are anticipating this contribution issue, and as soon as they receive an acceptable offer, they actually give the buyer a heads-up about the contribution issue and ask whether they have the cash available to make a contribution, if it’s needed to close the deal.

To avoid the buyer having to overpay for the property, I’ve even seen listing agents negotiate a lower contract price than the price the buyer was offering in the first place and advise the buyer to secure a loan approval with as low a required downpayment as possible, so that the buyer can conserve his or her cash to have it available to make a contribution to the second.

This also allows the buyer, post-contribution, to have paid no more than the home’s fair market value.

Many banks suggest that sellers make the contribution to close this gap out of their own pocket, savings or retirement funds, or even via an IOU or promissory note. This solution is much less feasible, in my estimation, than working to revise the transaction so that a buyer can make the contribution.

It makes little or no financial sense for sellers — who are already taking a loss and a credit hit — to bind themselves to pay more money in the future to the lender for a home they are losing and leaving.

For the seller to make a large contribution to get the short sale done would be especially nonsensical in no-recourse states like California where, if the home goes back to the lender via foreclosure, the lender cannot sue or otherwise come after the owner.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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REThink Real Estate

Tara-Nicholle Nelson
Inman News

Q: I just got a letter from my mortgage lender offering me a 6.5 percent fixed interest rate on my home equity line of credit balance, which is right around $100,000 and is the only debt I have on my $500,000 home. My family and friends think that’s a great rate, and are urging me to fix it.

My hesitance is that my current interest rate on that line is in the 2 percent range and it has never been higher than about 5 percent in the several years I’ve had the loan.

A: Author Erica Jong once said, "Advice is what we ask for when we already know the answer but wish we didn’t." Reread your question and you’ll see what I mean.

Mindset Management

There’s always the fear that if you don’t take advice you’ve been given by different people, you’ll be making a mistake. Or perhaps you’re wondering if there’s something you’re not missing that everyone around you knows — that’s also a very common human psychological tic — to assume that the popular opinion is necessarily correct. But if we’ve learned nothing from the last few years, we should have learned that the popular course of action — especially when it comes to real estate, mortgage and personal financial decision-making — is very often, in fact, not the smart course of action for everyone.

But let’s get down to why you’re being given this advice, and how to really approach making this decision. Some folks would just say that it’s a no-brainer: Keep your loan.

Others always prefer fixed to adjustable, but in your situation, to "fix" your home equity line of credit (HELOC) would be to sign up for a more predictable, but almost certainly higher monthly payment than what you’re currently paying. That just does not make good financial sense, in my opinion.

There are a number of reasons why your friends and family are advising you to do this, though. And there are also a number of ways to systematically assess the risk of continuing with an unpredictable interest rate and payment on this loan.

Need-to-Knows and Action Plan

Human nature is to make verbal shortcuts, which often result in corresponding mental shortcuts. Since the crash of the subprime mortgage market, many people made the verbal shortcut of referring to subprime loans as adjustable-rate mortgages (ARMs). While it’s true that many predatory and/or unwise subprime mortgages were, in fact, ARMs, the worst and most foreclosure-prone of these had several dramatically bad characteristics to them, which had little or nothing to do with the fact that they had an adjustable interest rate.

In fact, the undesirable characteristics of some subprime mortgages that rendered them likely to end up in foreclosure were, primarily, the failure of their lenders to require any income documentation and the failure of their lenders to require any repayment toward principal and/or interest during an introductory period (the latter in the case of the option ARM, in which balances actually grow over time if the minimum payment option is consistently made).

The distinctions between these "broken" ARMs and your HELOC weigh against electing to fix your ARM. Your HELOC almost certainly requires payment toward both principal and interest every month, and did from the very start of the loan. That means that when your rate adjusts, your payment will adjust only incrementally, and it doesn’t ever stand to double or triple the entire payment amount (like an interest-only or option ARM payment adjusts after the introductory period elapses).

Additionally, the low balance of your second is in stark contrast to many whose ARMs were their first mortgages, with balances of several hundred thousand dollars and much more (in some cases).

You are in a position to evaluate the risk the adjustability of your HELOC’s interest rate poses, and there are very likely some features built into your loan that help manage that risk. Dig up your loan documents for the HELOC and look for your interest-rate cap and adjustability caps. Almost every HELOC that was originated within recent memory has a cap that sets a top limit on how high your interest rate can ever go.

Also, they almost all have a cap on how much of an interest-rate increase your loan can ever adjust in a given time period, usually a year.

It’s also important that you know and keep an occasional eye on the rate index on which your HELOC’s rate is based. This will also be in your loan docs. Some indices move faster than others, but almost none of them are going to skyrocket upwards in less time than you could refinance your HELOC.

Most people take refuge in knowing their caps, and knowing that they can revisit the idea of fixing these types of ARMs if and when they ever do break, so to speak, by adjusting beyond their comfort level. (This is especially true for you — since you do have a great deal of home equity, fixing that HELOC should not be a problem if and when you do ever decide to do it.)

Unlike the ARMs that have infiltrated the national consciousness, your ARM is not broken. You know the old saying about fixing things that aren’t broken, right? Don’t.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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Law of the Land

Tara-Nicholle Nelson
Inman News

Homeowners Patricia Ostolaza-Diaz and Jose Luis Diaz-Goyes had two Bank of America mortgages plus a home equity line of credit, also with Bank of America, on their Virginia home, according to court documents.

They reportedly received an unsolicited call from a mortgage broker who claimed he was from Bank of America and could refinance their loans into a lower monthly payment. The broker was working with Countrywide Home Loans and allegedly knew that the new loan arrangement would result in a higher monthly obligation to the homeowners.

At closing, homeowners were provided with and signed all the required disclosures and documents, including a truth-in-lending statement that accurately stated the actual post-refinance monthly payment obligations. As time went on, homeowners could not afford the monthly payments and, eventually, foreclosure was instituted on their home.

The homeowners filed suit against Countrywide Home Loans, alleging fraud, intentional infliction of emotional distress, and violation of the Truth-In-Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA).

After Countrywide removed the case to federal court, the district court dismissed all claims. Homeowners appealed, specifically reasserting their fraud and intentional infliction of emotional distress claims.

In evaluating homeowners’ appeal, the Court of Appeals first set forth the elements of a successful fraud claim under Virginia law. Homeowners were required to show: "(i) a false representation (ii) of a material fact, (iii) made intentionally and knowingly, (iv) with an intent to mislead, and (v) reliance by the misled party, (vi) which results in damage to the misled party."

The appellate court ruled that, as a matter of law, homeowners could not possibly prove that they had reasonably relied upon any misrepresentation by Countrywide’s mortgage representative, because "at closing, they were presented with documents that unambiguously spelled out the terms of the loan and contradicted (his) oral statements."

In this unpublished opinion, the Court of Appeals went on to cite a precedential opinion setting forth the rule of law in Virginia that reasonable reliance cannot exist where the party claiming fraud had in their possession a written document contradicting the fraudulent statement, even if they failed to read the document.

Next, the court turned its attention to homeowners’ intentional infliction of emotional distress claim. In Virginia, the court explained, this cause of action requires that "(i) the wrongdoer’s conduct was intentional or reckless, (ii) the conduct was outrageous and intolerable, (iii) the alleged wrongful conduct and emotional distress are causally connected, and (iv) the distress is severe."

For homeowners to meet the element of outrageousness, Countrywide’s behavior would have to have been "so outrageous in character, and so extreme in degree, as to be regarded as atrocious, and utterly intolerable in a civilized community."

The Court of Appeals found that, even taken in the light most favorable to homeowners, the Countrywide loan representative’s behavior was simply not egregious enough to meet the required level of outrageousness.

Making intentionally false representations and refinancing the homeowners’ loan with the result of payments they could not afford does not, the court ruled, "rise to the level of actionable conduct."

Accordingly, the Court of Appeals affirmed the lower court’s ruling dismissing the homeowners’ case in its entirety.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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Image courtesy of GetFinanciallyNaked.com

Tara-Nicholle Nelson
Inman News

Book Review
Title: “Get Financially Naked: How to Talk Money with Your Honey”
Authors: Manisha Thakor and Sharon Kedar
Publisher: Adams Media, December 2009; 208 pages; $12.95

My friend Danielle LaPorte, at WhiteHotTruth.com, recently plead a virtually irrefutable case for the power of an invocation. Initiating any process or experience with a clear, ritualistic statement of your intention sets the energetic stage for both invoker and invokee — or author and reader, when the experience is a book. Invocations make it much more likely that the author’s intention will manifest into reality; that the message will hit its intended mark.

And so it is with the invocation that opens “Get Financially Naked: How to Talk Money with Your Honey” (GFN), wherein authors Manisha Thakor and Sharon Kedar boldly declare, ” ‘Get Financially Naked’ will empower you to live the life that makes your heart sing — on your own and in the context of your romantic relationship.”

A grand statement of intention, this invocation creates big expectations, which, fortunately, the rest of the book does not disappoint.

Best friends who both hold master’s degrees in business administration from Harvard University and are chartered financial analysts, with “Get Financially Naked,” Thakor and Kedar fulfill their promise to provide readers with “the roadmap, language and tactical tools to talk successfully about money” with their partner or spouse.

With money ranking on numerous recent studies as the No. 1 issue couples fight about and the most often-cited reason for divorce, successful money talks between partners seem like an exceedingly worthy aim.

The authors elaborate that their titular command to “Get Financially Naked” is, in fact, a two-step process. The first component of Thakor and Kedar’s financial nudity is for both members of the couple to “get on the same financial page,” learning the skill of having constructive conversations on the subject of money and, thus, minimizing the financial stress on the relationship.

Step 2 involves making smart, joint decisions about money. The authors clarify up front that getting “financially naked” is (a) not an activity to be undertaken by anyone but serious and committed partners, and (b) a way of life to be practiced continuously for the duration of the relationship — it’s not a one-time thing.

Written primarily for women, and replete with examples of women whose lives were disrupted or brought to the brink of ruin by failing to have smart money conversations with their partners, GFN aims to ease the often painful process of creating alignment on money matters within a relationship.

To that end, in Part A, “Own Your Finances, Own Your Life,” readers are guided through a written session of financial therapy, as the authors lead them through visualizing how their lives will be when they begin to live from a position of financial strength, getting clear on their existing financial beliefs and broaching the topic of money with their partner.

Part B, “Talking Money with Your Honey,” guides readers through the process of assessing their financial compatibility with their mate and walks them through five specific, powerful financial questions to answer with their mate — including a couple of questions that explore the impact of each partner’s family financial history on the money area of the relationship.

The final section, Part C, “Time to Get Tactical,” offers actionable tactics, rules and solutions for jointly managing savings, investing and financial planning. A useful appendix offers Thakor’s and Kedar’s answers to frequently asked questions.

“Get Financially Naked” is a short, simple, but smart and deep dive into the money issues that literally tear relationships and marriages apart. While it offers an orderly, calm approach to working through money disconnects and bringing them into alignment for couples who are already fully involved in a joint life, many longtime marrieds will read it and wish they had had these conversations way before getting married or committed.

In fact, GFN would be brilliantly used by couples contemplating spending their lives together, to explore and resolve money issues before they become real issues. Likewise, any woman with a hesitance or dread to confront money issues with herself, her parents, her boss, or anyone else with whom she needs to have money conversations might truly benefit from the therapeutic exercises offered in GFN.

Tara-Nicholle Nelson is author of “The Savvy Woman’s Homebuying Handbook” and “Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions.” Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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