Mortgage expert Tracey Rumsey, author of Saving the Deal (AMACOM, 2008), responds to your questions about how you can avoid potential transaction deal killers.

Q: What’s the most common deal killer in a transaction that you've seen in the mortgage business?

A: I'm seeing a lot of problems with home inspection issues, especially with the buyer's market environment we're in now. Buyer's are much more demanding when inventory is high. Sellers who don't want to comply are seeing buyer's walk away without a backward glance to move on to the next house. Real estate practitioners who prepare their sellers for this attitude and help them be proactive by offering them a pre-listing checklist of maintenance/repair items will come out ahead.

The ideal solution is to convince your seller to have a professional home inspector go though the home immediately so that issues can be addressed now. What a boost to the buyer's confidence in the property when they can view a report, and then be shown the repair items and how they were remedied. My favorite icing on the cake is when a practitioner offers, as part of the listing agreement, to pay for a home warranty for the buyer. The practitioner only pays when a sale is successful and the property becomes even more attractive in a competitive market.

Q: Can incentives that sellers are offering to buyers — such as buying down points on a mortgage or even adding other temptations — affect an appraisal later on?

A: Yes in some cases. Some costs, such as normal closing costs and prepaid items of the buyer, can be paid by the seller without affecting the appraisal (as long as they are within underwriting guidelines for that loan program). Contributions in excess of underwriting guidelines

must be considered a sales concession and deducted from the value. Another good example of a sales concession problem is selling a home fully furnished. Contract language must be very specific to avoid problems.

Q: FHA (Federal Housing Administration) and VA (Veterans Affairs) loans are being touted because of recent increases to their loan limits. In the past, there have been some problems because the loans’ interest rate lock expired or changed negating a rate lock during a transaction. No one has mentioned the words “discount” or “rate lock” recently with these loans. Is the process still the same with these programs?

A: FHA and VA loans now work exactly the same way as a regular conventional loan when it comes to locking in an interest rate. This is a huge plus since these programs are becoming more and more popular as other low or no-down programs are eliminated or experiencing major credit-tightening over hauls.

Q: Can an ARM with a locked in interest rate for a certain amount of years still be a good solution for certain buyers or are ARMs too risky in this market?

A: Adjustable Rate Mortgages (ARMs) can be a great alternative in the right market for the right borrower. If a borrower knows that he will most likely only have the mortgage for a short period of time due to large additional income in the near future (inheritance, bonuses, etc) or re-location, an ARM loan could be a money saving alternative.

It also makes sense that the risk should be balanced by the gain incurred. In other words, the interest rate should be significantly lower than a regular fixed rate loan to justify taking the risk in the first place. In some markets, the interest rate difference is so slight that there is no point. In a slow or declining-value market, ARM's carry an additional risk because there is less certainty that the borrower will be able to sell the home and get out from under the mortgage in the time-frame necessary to avoid the impending interest rate adjustment.

The biggest problem with ARM loans are that they have been misused for a purpose they were not intended for. Loan officers used the lower interest rates to help borrowers qualify for higher priced homes. Borrowers were too focused on getting the house of their dreams and loan officers weren't focused enough on fully explaining the consequences.

Q: Are buyers required to take a class in homebuying before they can close escrow with VA loans? Is this something new?

A: VA does not have any kind of home buyer education class requirement. However, if you do a VA loan through your state housing agency program the state may have a buyer education requirement. Many states have dropped this requirement, but not all. It is my understanding that buyers can take the state class as early as they like in the process, but you would want to check with your specific agency.

Q: Have lenders gotten more careful in writing pre-approval letters because of all of the problems recently with people getting into loans they couldn’t afford? How can practitioners know for sure that their client with a pre-approval letter can really afford the property and even get a loan?

A: I wish I could tell you that the current mortgage crisis has created a better loan officer. It hasn't. You now have hungrier loan officers, not smarter ones. This means you have to be smarter now. Then to make things worse, even those of us who take every precaution to provide competent service to our borrower find ourselves in a mine field of loan program changes. We can write a pre-approval letter today only to discover that (for example) due to a change in minimum credit score requirements our client no longer qualifies for that program 30 days later. Ahhhhhhhh!!!!!

With the mortgage market we are in today, there is no way to avoid these unforseen problems. Hopefully the program change is announced with enough advance warning that the loan officer can advise their clients and a settlement can happen before the change becomes effective. When you receive a pre-approval letter I highly recommend reviewing it for the following information:

• Does the letter state the sales price of the home the borrowers are pre-approved to purchase?

• Does the letter state that the credit, income and assets of the borrower have been verified?

• Does the letter state that the loan has been pre-approved through an automated underwriting system?

If the letter doesn't have this information it's well worth your while to get the loan officer on the phone and get some answers. None of these questions will violate the financial privacy of the client, but they will offer a better understanding of the quality of the letter you have in your hands.

Q: What can a buyer’s agent do to make sure the title won’t cause a problem in closing?

A: Carefully review the title report ASAP and ask questions! Don't assume anything! Your buyer could be wasting their time on a property that cannot close because the seller has a large judgment that must be cleared in order to sell. Some quick math and a few questions could help you and your client move on faster.

Q: What can buyers do (except prequalification) to avoid losing a home because they can’t get a loan?

A: In some cases sellers may allow a lease with an option to buy if it looks like the buyer's qualifying problem could likely be resolved with time, i.e. credit scores too low but income is good. They would enter into a contract stating a lease period (usually at least one year), a sales price, and a monthly lease amount. It's important to know that only amounts paid over and above market rent can be applied toward a borrower's down payment during this lease period.

Q: In your book you talk about the importance of talking with your clients about HOA rules. What have been some possible deal killers that have come about from HOAs that we should be aware of?

A: The ugliest one is the special assessment. This happens when a maintenance project needs to be funded and there isn't money available. A special assessment is levied against the members, usually by increasing the monthly HOA fee temporarily. Some assessments must be paid in full upon demand. This assessment may be "in the works" but has not been finalized. The only way you could know about this is to ask for the minutes of past meetings of the board and the association. Review them carefully. Always get copies of the governing documents (bylaws, etc.) and let your client review them.

If the association has a newsletter, ask for back copies of that as well. I also recommend talking to some or all of the board members to get a better picture of what you are getting your client into. Poorly run HOA's are common, and you don't want your client to associate you with a bad experience.

Q: What options can a mortgage lender offer to a seller who owes more on their mortgage than what they can actually sell their home for now? Are more considering short sales or trying other work-out solutions?

A: Sellers will have to contact their loan servicers to see if they will accept a short sale. This is where having a real estate practitioner experienced in short sales can be invaluable. The lender will want to see that the home is listed with an agent, and I have seen many agents do a fantastic job helping sellers out of a tight spot. With the current market conditions, short sales are becoming more and more common.

Posted on March 31 at 11:30 AM | Permanent Link | Add a Comment (2)

Quick Skim

Your buyer found the perfect home. Your seller found the perfect buyer. Yet, as you near closing, all types of title, mortgage, appraisal, and home inspection problems can keep you from closing. Mortgage expert Tracey Rumsey has seen it happen all too often. In her new book, Saving the Deal (AMACOM, 2008), she offers tips on how to avoid these potential deal-killers that jeopardize or delay transactions. Home listing and homebuying checklists in the book offer you questions to ask your clients to make sure these problems don’t surface later on and cost you a sale.

              Buy the Book

From the Book: 5 Common Deal Killers

Any number of pitfalls can arise during a transaction that prevent the buyer or seller from signing on the dotted line. In her book, Rumsey offers common scenarios she’s seen and how to overcome them. Here are five:

1. Title complications. The title is legal evidence of the ownership of the property and is crucial when trying to help your client buy or sell. But problems can arise when such issues as death, divorce, guardianship, and bankruptcy enter the picture. Review the title carefully — this goes for buyer’s agents too. Troubleshoot any potential title issues early on. Direct sellers to a real estate attorney to resolve any problems. And don’t just take the seller’s word when it comes to the title — look it up yourself. Most title companies offer access to a limited amount of title information through their Web sites.

2. Unrealistic equity expectations. Have a talk upfront about all of the costs of selling a home so that sellers don’t end up backing out at the last minute. Rumsey’s book offers a worksheet that you can walk through with your sellers to paint a realistic look at estimated final numbers on closing day. It takes into account such items as mortgage payoff, any mortgage prepayment penalties, sales commission, title insurance for buyers, closing and recording fees, and

property tax pro-ration. But what if you crunch the numbers and then the seller realizes she can’t afford to sell? Better to know now than after the cost of your time and money later.

3. Financing snags. Your buyers find the perfect property, you write up the offer, and then their financing doesn’t go through. It’s not just about having good credit when it comes to getting a loan. Educate yourself about the loan process so that you can help buyers foresee any potential problems. For example, a recent job change, a probationary period when starting a new job, and jobs that rely on commission income can pose problems in getting loans. Also, help prepare first-time homebuyers by learning the guidelines of your state’s housing loan programs, which may offer below-market interest rate loans and down payment assistance.

4. Appraisals. When appraisals come in at a value lower than the contract price, you have a major potential deal killer. So listing agents need to make sure they list the home at the right price from the beginning. To counter a low appraisal, you can provide the lender with the process you used to determine the price of the home and appropriate comps. But don’t call the appraiser, unless you were the one who ordered it. Do not expect a request for a second appraisal to be granted; they rarely are. One solution is to drop the sales price to match the appraised value, if it’s a small difference. Otherwise, you may need to take more drastic action, such as offering a commission reduction to get the seller to move forward. “None of us like dropping our profit margin to save a deal, but sometimes it’s what we have to do to get to the settlement table,” Rumsey writes.

5. Pre-approval letters. These letters issued by a loan officer tell you that after a full review of the buyer’s credit, income, and asset status, she is very likely to meet the requirements of closing on a loan. Not so fast. Before your seller accepts the offer, make sure the buyer really can close. There are varying degrees of competency when it comes to loan officers, just like any other industry. That said, some of these letters issued are after a thorough investigation into the buyer’s finances, while others came from a five-minute conversation. Read each letter carefully. Does the letter state the actual sales price that the home the buyer is approved to purchase? Does it state that the buyer’s credit status, income, and assets have been verified? If these questions aren’t answered, call the loan officer for clarification. If the answers are “yes,” you likely found a solid buyer, Rumsey says.

Sneak Peek

“Deals can be saved by proactive thinking at the beginning of the transaction. Blowups or delays just before settlement, no matter who is at fault, hurt your client and your reputation. Your clients may logically understand that the problem had nothing to do with you, but there may still be negative emotions tied to you that may prevent them from calling in the future when they need an agent.”

About the Author

Tracey Rumsey has more than a decade of experience as a mortgage loan officer. She is the chair of the Utah Mortgage Lenders Association Education Committee and is also a mortgage and real estate continuing education instructor licensed with the Utah Division of Real Estate.

Check back on Monday, March 31, to read Rumsey’s responses to your questions.

Posted on March 20 at 02:01 PM | Permanent Link | Add a Comment (13)

Here are the latest top selling books about business and investing from Amazon.com:

1. Predictably Irrational: The Hidden Forces That Shape Our Decisions, By Dan Ariely

2. The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich, By Timothy Ferriss

3. Getting Things Done: The Art of Stress-Free Productivity, By David Allen

4. Good to Great: Why Some Companies Make the Leap ... and Others Don't, By Jim Collins

5. Women & Money: Owning the Power to Control Your Destiny, By Suze Orman

6. Strengths Finder 2.0, By Tom Rath

7. Stop the 401(k) Rip-off!: Eliminate Costly Hidden Fees to Improve Your Life, By David B. Loeper

8. Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, By Steven D. Levitt and Stephen J. Dubner

9. The Official Guide for GMAT Review, 11th Edition

10. The Tipping Point: How Little Things Can Make a Big Difference, By Malcolm Gladwell

Posted on March 11 at 04:40 PM | Permanent Link | Add a Comment (1)

Saving the Deal author Tracey Rumsey is ready to answer your questions about preventing deal killers from entering your real estate transactions. The Weekly Book Scan has an author chat scheduled with Rumsey at the end of the month, and we're giving you the chance to tap her expertise and submit your question. Simply click on the "submit" button below to e-mail your question.

Rumsey is a mortgage and real estate continuing education instructor, who has more than 10 years of experience as a mortgage loan officer. In her new book, she highlights how you can avoid the most common deal breakers in real estate.

We'll pass along a selected few of your questions to Rumsey. Please keep your questions general so that others can benefit from the responses too.

Rumsey's responses will be posted to the blog on March 31.

Posted on March 6 at 12:12 PM | Permanent Link | Add a Comment (0)

Real estate pros share with us what books they're currently reading and whether it's worth the read.

• Never Eat Alone (Currency, 2005), By Keith Ferrazzi and Tahl Raz

“This book is a must read for all new agents. The author goes into detail on how to market yourself and network properly. It is the perfect guide for a first year agent who is looking to get their name out. The author discusses not only his successes, but his mistakes in life, too. It’s a great guide to follow to figure out what it takes to flourish in business, and succeed in marketing ‘you,’ the agent. One of the great pieces of advice the author gives is making sure you always follow up with everyone you meet, in three ways: by mail (or e-mail), by phone, and in person. I follow this rule with all my new prospects.”
— Jason Bonnet, Weichert REALTORS®, Washington, D.C.

• Endless Referrals (McGraw-Hill, 2005), By Bob Burg

“This one should definitely be in your top 10 or your MUST READS for 2008 list. Most of us do not fully utilize the client in front of us to lead us to our next client. I decided in November 2007 that I would change this picture and reduce my marketing and advertising expenses while

increasing my sales volume by developing a ‘referral system.’ Since then, I’ve read several books on the subject and this one, so far, tops the list. … Every [practitioner], new or seasoned, who plans to be in the business for the next 3-5 years or longer, needs to get a copy of this one and read it, then re-read it, and put his suggestions into action ASAP.”
— Ron Reed, The Mortgage Doc, Sellers Financial Group Inc.

• Why we Want you to be Rich (Rich Press, 2006), By Donald Trump and Robert Kiyosaki

“It’s a great book about the trends around the United States, both in real estate and financial well-being. Both authors describe how they have made their wealths in the real estate industry, regardless of a down or up market.”
— Bill Somerset, Century 21 Central Falls Realty, Dover, N.H.

Tell us what you’re reading. Send an e-mail to bookblog@realtors.org that includes the title of the real estate book and its author, along with your name, contact information, and what you like or dislike about the book.

Posted on March 3 at 02:45 PM | Permanent Link | Add a Comment (0)