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By Tara-Nicholle Nelson | Broker in San Francisco, CA

5 Real Estate and Mortgage Urban Legends

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 percent 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 percent 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!

P.S. - You should follow Trulia and Tara on Facebook, too!

Comments

By Jean Sullivan,  Thu Apr 7 2011, 04:47
On Seller Financing - Banks wont usually exercise the due on sale if the payments are being made on an older loan, so make your payment to the bank if there is a loan, not to the person providing owner financing. They should be OK with that if you show proof you are paying and make up any difference to them. Existing loans for the most part have a higher interest, so why would the bank call a preforming loan they are making more money on?
By Greg Haraksin,  Thu Apr 7 2011, 04:55
wow. great post. I'm going to bookmark it.
By Aiza@mobilehomes,  Thu Apr 7 2011, 05:06
"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. "

I agree. But I think what's best is trying to work our their problems and avoid losing their homes. great post!Boise Homes for sale
By Conlonc,  Thu Apr 7 2011, 05:27
I wax approved for a doctor's loan that's 100% financed. Is it a bad idea?
By Jennifer McDaniel,  Thu Apr 7 2011, 05:42
Very good article, ty!
By Lauri Pine,  Thu Apr 7 2011, 05:46
I usually love your column but today I am disappointed.
You can help a distressed homeowner by taking over their mortgage 'subject to' the current mortgage.
The new buyer will just begin making payments. The bank doesn't care who makes the payments as long as they are made .
The payments go through a third party. You do not make the payments directly to the homeowner.
This protects both the buyer and current homeowner.
These arrangements are not for 10-30 years. They are usually one to three years. Just long enough to build a track record of payments and to repair credit. Then the home is purchased with conventional methods.
By Daniel Moyle,  Thu Apr 7 2011, 05:47
As always, a great read. One thing to add: 100% financing may be difficult, but it's a definite option. Rural Development and VA loans offer 100% financing and other great options for qualified borrowers. So serving our country (VA loans) or looking for a "house in the country" (RD loans - though it's not necessarily country, just outside city limits) can really yield great benefits for first time home buyers!
By Darrell Bauguess,  Thu Apr 7 2011, 05:54
Always great info and needed to keep us all thinking! Thanks Tara
By Columbusbuyersagent,  Thu Apr 7 2011, 06:05
The poor condition of many foreclosures continues to surprise buyers, even those who are looking for a great deal. That old adage "you get what you pay for" still applies, even in today's market, and many buyers are still not willing to accept this fact. The article is correct that a buyer is quite often better off negotiating with a seller who is able (and willing) to agree to a price reduction or other concessions that a bank will not consider (or respond to). While 100% loans can be found, I'm not sure how many in the industry believe that they're a good value for anyone -- VA or otherwise. Save $$ for a down payment and build some equity up front.....then enjoy!
By Joy Baker,  Thu Apr 7 2011, 06:15
Great post Tara. I spend a great deal of time educating prospective buyers about the fact that discounted pricing on foreclosures here in New Hampshire has much more to do with poor condition (read non-financeable) than the fact that it's a foreclosure.
I agree with Daniel regarding 100% financing...it is still available through Rural Development and VA financing.
Lauri, your proposed scenario - a third party arranges for, and collects, payments from a would be buyer (ostensibly to build credit so that a real loan can be obtained) on behalf of a distressed seller (supposedly to save them from foreclosure)- sounds a lot like the Rescue Scams that are being smoked out and prosecuted throughout the country. I sincerely hope you are not involved in something like this.
By Dianne Sokol,  Thu Apr 7 2011, 06:18
Should you find a REO that is in need of work there is special financing at a lower interest rate to make those improvements. Bank are out to make money and a REO house isn't cost efficient and they are willing to sell at a lower price if the house meets the appraised value.
By Juan Vazquez, SFR, CPMS,  Thu Apr 7 2011, 06:50
Thanks for a well written post, as always.
By Juan Vazquez, SFR, CPMS,  Thu Apr 7 2011, 06:51
Thanks for a well thought out and written post, as always.
By Anna Baran,  Thu Apr 7 2011, 06:53
Great article. I am amazed how many of these issues come up again & again. Financing, foreclosures,... Years ago someone would buy their home with 20% down, pay their mortgage for 10 years, then stop paying due to job, health, etc & the bank would take the house & sell for the mortgage owed. Those homes had equity in them. Not the case any more! Plus, the homes are in poor repair in most cases. The banks are trying to get fair market value because that's the most they can get to recoup a much larger loan owed. Home buyers should get their information from reliable sources. This article is fabulous because it puts the reality back in the home buying process. There are opportunities out there. Have to do your due diligence. Thanks for a great article.
By Sb,  Thu Apr 7 2011, 06:56
Another myth is that no one's to blame for the housing mess that lead to all the other myths talked about here. When are the bankers, mortgage brokers and real estate brokers/agents who were enablers of no-income varification loans and overvalued pricing going to be tried, convicted and jailed for their roles in bringing the near collapse of our banking system that is still rippling through our economy? Let's not lose sight of why the newly unemployed are losing their once overpriced properties to foreclosure. At least the auto industry seems to be getting back on its collective feet. Except aren't we now seeing ex-bankers, mortgage brokers and real estate bottom-feeders now selling used cars, a befitting role?
By Alan,  Thu Apr 7 2011, 07:06
Maybe these comments are valid in Tara's backyard, but I find particular fault with #1 and #2.

I have been on both sides of Seller financing and it works well. Yes, all the "maybes" maybe apply in some cases, but nothing's simpler and cheaper when there are no "maybes".

As for "spiffing" a house. Here's a real-world example. Own a brick-front, 3,700 sq ft house on a 1.2 acre gorgeous lot which is assessed at $388K. True "market value" is closer to $318K. Highly-desirable community. "As-Is" condition is a "B" ... could use fresh paint, carpeting, and a new downstairs gas furnace and central air [all of which are 15 years old].

The houses immediately adjacent to mine are assessed at $789K and $675K; the house opposite me, which is waterfront, is assessed at $1,015K.

Since I can afford to take a bath on the house, I tried FSBO. By eliminating the non-value-added Real estate agent's commission and spiffing costs, I priced it at $99K below market ... $219K. Since I have a 3.125% mortgage [and any new owner might not be able to get one], I also offered 100% owner-financing at 0% down ... essentially, the new owners would pay me to pay the mortgage.

The best offer [it was all-Cash] was for $188K ... which I declined.

So, you can see, in today's market NOTHING MAKES SENSE.
By Frank Gleason,  Thu Apr 7 2011, 07:25
All of the above, so true. I find mostly the younger people tend to believe these myths because they are convinced they can get into a move-in ready home for these unbelievable prices.
By Kyra Quarles,  Thu Apr 7 2011, 07:46
Another great article Tara, Thank you!
By Doug Rush,  Thu Apr 7 2011, 07:56
I think more people would offer owner financing if they knew they could sell their note for cash soon after the sale of their home. This is an option that most real estate agents don't know about or tell their clients.
By Stephen Kass,  Thu Apr 7 2011, 07:58
Sellers need to be carefull when someone suggests they sign over the home to them to get them out from under. It is the sellers name on the mortgage contract. Just getting rid of your home does not absolve you from the responsibility of paying off the mortgage. I know of this happening all too often in this distressed market.
By Jim Lee,  Thu Apr 7 2011, 07:58
RE: Last Paragraph of #5.
Absolutely the best deals are to be found with those solvent homeowners trying to sell their properties. They are more willing to negotiate repairs and sometimes even updates. I always encourage buyers to look more closely at those properties verses lender owned properties. For one thing the process is much quicker. Also buyers will find homeowners will more easily negotiate paying some of the closing cost as well.
By Terry And Claudia Streckfuss,  Thu Apr 7 2011, 08:25
Alway good information,
By Korby Matsen,  Thu Apr 7 2011, 08:27
To call #1 - Seller Financing and #3 - 100% Financing for 1st time home buyers Urban Legends is just downright false.
Seller financing is an excellent way for home buyers with imperfect credit to buy a home. The misinformation in those paragraphs alone are to numerous to mention. As for 100% financing, there are numerous programs available that can get a 1st time home buyer in a home with 100% financing.
It's these types of articles that are preventing uninformed potential home buyers from venturing into the market and thus, extending our housing downturn longer than it needs to be.
By Estrella Nodarse,  Thu Apr 7 2011, 08:33
Can I buy a house with addition (florida room, and a bedroom) without permition?
thank you.
By Sebastianmartinez,  Thu Apr 7 2011, 08:38
100% financing is a real thing now in the DC Metro Area. BB&T Bank has one, needs 680 credit scores full documentation, however income to debt ratios are pretty strict. Virginia has VHDA which allows 103% Financing and Prince George and Montgomery County has CDA, NSP and HOC Down payment and closing assistance programs (Grants). Sold two or three listings last year using them.

I have to admit, I was 'very skeptical' first, but they closed on time. After, I began referring biz to the loan officer that approved them. Now, I heavily advertise my homes under these programs. I encourage any buyers, sellers and real estate agent to be on top of these kind of information (competitive advantage).
By Robert Sizer,  Thu Apr 7 2011, 08:52
I agree, equity sales may still be the best opportunity for buyers to get a good deal with the most flexible terms, plus, all the property disclosures that come with the knowledge of the homeowner. REO properties are better suited for savvy investors and/or handymen & women looking to put in some sweat equity before realizing a long or short term benefit.
By Sebastianmartinez,  Thu Apr 7 2011, 08:59
VERY MUCH AGAINST SELLER FINANCING!!! Seller can die, divorce and their state or spouse will not honor the agreement. Also sellers could take a loan against the property. If you must do it, make sure that your contract is RECORDED in court house, this will put a cloud on the title and possibly prevent the seller from selling it or taking a loan in the future. One last suggestions, use a established attorneys firm to escrow or keep on file a pre-signed deed ready to go on record when the loan is paid off.
By Danielle Sharp,  Thu Apr 7 2011, 09:12
100% financing is available in some markets through USDA. We have the ability in my marketplace and lenders who can fund them!
By Lila Ellis,  Thu Apr 7 2011, 09:26
Great article! Thanks Tara.
By Yellowsand1964,  Thu Apr 7 2011, 11:20
we been trying to refinance our home, and every time at the last minute the bank ask for 10,000 or 20,000 for closing
is really real; the Obama proposal for homeowners as us?
and where are those USDA refinance service for low income families as us?

and wonderful post Tara thanks
By Househunter123,  Thu Apr 7 2011, 12:21
I learned a long time ago that doing business with a bank is only going to cost you. If people started saving when they are young most of what has happened they would not find themselves in a financial mess when they become ill or umemployed. When you leverage yourself to the brink and then wonder why your plan implodes at the slightest bump in the market you have only yourself to blame for financial ruin. When did real estate agents become your friend or financial advisor in the most important purchase of your life? Most of them are dumber than the bricks on the house that you buy. (I did not say all, but the majority are just greedy sob's who don't give a care about whether you go broke as long as you pay their commission!) Pay with cash and then you have control over what happens in your life. It isn't easy, but as the years go by it is amazing how easy it becomes and the benefits come in many ways; the best of which is that you can sleep at night.
By Kim Regan,  Thu Apr 7 2011, 13:38
I'm hoping many have the sense to value non-bank owned property that has been rehabbed and never allowed to sit unheated with vermin running through it chewing wires and such. I have a little 2 bedroom rehab I am getting ready to put back on the market, and that is going to be one of my selling points. Fully paid off and would cash flow from day one for a landlord. The nearby bank owned homes are largely rental properties that have been through several rentals that beat them to pieces and this one was purchased from the original owner. Hopefully, they will value a quick close with no title entanglements too.
By Esther Cunningham,  Thu Apr 7 2011, 14:35
Thank you, Tara, for your no-nonsense approach in revealing three myths in real estate. Loved to hear more before we buy our first home.
By Connie Taz,  Thu Apr 7 2011, 16:29
I recently began reading your blogs, Tara, and truly appreciate them, as well as the comments of the posters. As a potential seller with a house on the market, and a future home buyer, I look for all the assistance that I can get. I want to be as knowledgeable as possible when (hopefully) selling our current house, and buying our future house. Thanks for everyone's help ; )
By Barbara,  Thu Apr 7 2011, 16:40
Great report! At 62, I confess to thinking some of these myths were still in play. I was thankful not to have bought into the "You HAVE to by a house! What are you thinking not buying a house?" As a single lady, I was glad not to have bought in the the hype a few years ago. I surely would have been left holding the bag.
By Lynne Stuparek,  Fri Apr 8 2011, 10:42
It is interesting that there is still so much misinformation about what financing options are available.
Some municipalities do have grant money , CDA money , etc but buyers and their lenders need to be sure the programs are still being funded and that the borrowers meet all the criteria for those programs. Some local banks are offering 1st time buyer programs , too.
USDA rural development loans do offer 100% financing and no monthly MIP; but the buyer must pay a 3.5% lender guarantee fee. There are also a lot of criteria that must be met - by the house : geographic location and condition and also the buyer: credit score, debt ratio and income guidelines all must be acceptable. If all the criteria can be met and if the buyer plans to stay in the house long enough to justify the 3.5% lender guarantee fee, then it is a great option. ( For more info go to their website - be sure it is the most recent because the details change with each new funding) Those who qualify for VA loans also have a great option. FHA is used by many but it is becoming less desirable due to repeated increases in monthly MIP
RE: seller financing:only a small # of sellers can legally hold the mortgage on their house for sale. As a seller why would I take the risk with a buyer who cannot qualify for a mortgage due to credit issues? Once someone is in your house it can be difficult to get them out, and there is no guarantee that the buyer will maintain it . If their credit is poor because they did not pay their bills, why would I risk my investment? As a seller I also would hesitate to let someone assume my mortgage - if they default I am liable and my credit can be ruined; meanwhile what if the house is being trashed ? There is also risk for a buyer if a seller is offering seller financing - your first question should be why?? Interest rates are at an all time low. Is the house in such bad condition that it cannot be financed? Is it grossly overpriced? Is the seller going to take the buyers' money and stop making payments? Anyone ( buyers & sellers) considering a purchase with either an assumable mortgage or seller financing should consult an experienced real estate attorney .
As an agent I try to educate my buyers about the different types of loans available. I also try to show them the value of a home for sale owned by a private seller versus a bank owned home which may have been vacant and unheated for months and may have obvious and hidden defects. There still is no free lunch; occasionally someone gets a good deal, but in most cases one gets what one pays for.
By Dale Smith,  Fri Apr 8 2011, 12:08
Good stuff; thank you for e-mailing this info on Urban Legends. Dale Smith, HOPE Realty, LLC, Lebanon, IN
By Ana,  Fri Apr 8 2011, 13:15
Is Rent to Own works and a good idea..??
By Ryan Anderson,  Mon Apr 11 2011, 00:25
Great article, thank you. I know you will agree that it is amazing what a little paint and carpeting will do to a home! Not always fun, but worth the effort and when done right by the home seller it can really improve the sellers net proceeds.
By Brian Petrelli,  Sat May 7 2011, 07:10
Great stuff. Thanks. We have way too many buyers in the market that watch too much late night TV infomercials ;)
By Lake Placid Homes,  Wed May 25 2011, 05:26
Good stuff..!!!!! I reading your post and truly appreciate them, as well as the comments of the posters.
For your no-nonsense approach in revealing three myths in real estate.
This is the wonderful post Tara thanks.
Lake Placid Homes
By Jane Grant,  Thu Jun 2 2011, 10:42
Number 5, where a distressed homeowner quitclaims the home to someone else, is being done by experts who have experience dealing with the banks!
By Charles Pantino,  Sun Jun 19 2011, 22:47
Sold three up scale middle class homes in a row. The first one, put a little money in to doctor up. It changed the selling price, not. The next two, left untouched and got my asking price , on the nose. I always structure the deal that the buyer walks away from the closing table with a little cash in hand. You get your asking price because they're focused on the cash that receive at closing table.
By Hoof Harted,  Sat Jan 28 2012, 13:01
Wow. Very informative post. I wonder if Dean Graziosi and Robert Kiosaki are aware of this...
By David Chiles,  Mon Feb 13 2012, 13:58
Nice! Very well written. Great layout. Excellent content. Your awesome!

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