Articles from Industry Experts
Some ARMs Leave Borrowers Without a Leg to Stand On
By Cliff Freeman
A study by the Federal Reserve Board suggests that many homeowners are confused about terms and conditions of their adjustable rate mortgage, also known as an ARM. Unfortunately, many of these borrowers will be caught off-guard when the initial honeymoon is over and their interest rate jumps upon the first periodic adjustment.
In particular, the Fed’s study concluded that about one third of ARM borrowers did not know how much their rate could increase at the initial and subsequent adjustments. About one in four didn’t know which index their loans used. When asked about their index, ARM owners gave responses including “the consumer price index” and “the going rate”. Nearly half didn’t know their lifetime cap, or maximum interest rate for the life of the loan. Many more couldn’t recall how their new rate adjustments would be calculated or the value of the margin to be used in the new rate calculation.
ARMs accounted for about a third of mortgages granted in 2004 and 2005, up from an average of about one-quarter in the 1990s. About 7.7 million of these ’04 and ’05 loans are outstanding, representing $1.888 trillion of debt. In recent months, however, the rise of short-term rates has greatly reduced the attraction of ARMs, and more borrowers are choosing or switching to fixed-rate loans.
The biggest risk with borrowers who bought homes within the past couple of years using ARMS is a slowdown in price appreciation. This can be especially painful in highly leveraged transactions (i.e. 100% financing) where borrowers have not built up an equity cushion to protect their home should they run into problems making payments or need to refinance. Non-prime borrowers with weak credit records are at very high risk. Many non-prime borrowers were sold 2/28 ARMS with 2-year pre-payment penalties, big margins, no escrows accounts and even interest only payments. The loan officers who push these products sell them as “credit repair” loans that allow the borrower to buy a home now and then have two years to clean up their credit. The plan is to refinance into an “A” paper loan when the 2/28 interest rate is due to adjust at the end of the second year. Sadly, this outcome is rarely seen.
Let’s look at an example. Say that a typical non-prime borrower took out a 2/28 loan in May of 2004 for $200,000. The initial interest rate for the first two years has been 7% with a monthly payment of $1,330. The 2/28 loans generally limit the size of the first jump in rates to around three percentage points. That would bring the monthly rate to 10% and payments would rise to $1,755. Should the rate go up another 2% at the end of the third year to 12%, the monthly payment would jump to $2,057, nearly a 55% increase over the original payment of $1,330!
Refinancing may not even be an option at this point as starting rates on ARMS have risen significantly in the past two years, credit quality is still likely to be an issue and income has not increased enough for borrowers to qualify at the new rates. Unfortunately, we will very likely see a big increase in the number of borrowers who cannot keep up with these payment increases and will run the risk of default. In our next issue we’ll take a look at the issues with Payment Option ARMs.
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Choosing the Right Home Inspector
By Don Norman & Mitch Sudy
Do you need help when recommending the right home inspectors? In today’s real estate market, virtually every agent and broker knows the importance of recommending a home inspector to their buyers. But do you know that you could be putting yourself at risk? Even if you recommend one, two or three inspectors, giving the buyers a list of all inspectors in your area could still result in a poor inspection.
Training – Home inspection training is just as important as experience. Many “old timers” were carpenters, electricians or builders in an earlier life and learned to perform home inspections “on the job”. As a less physically demanding profession, home inspections looked like an easy transition. However, there is no single trade that qualifies someone to move into the field of home inspection without extensive training. Make sure you look for an inspector who has been professionally trained by a qualified training school such as Kaplan Professional Schools, Inspection Training Associates (www.home-inspect.com). A professionally trained inspector from a recognized training school increases the odds of a quality inspection and reduced liability.
Continuing Education – Even well trained inspectors must continually update their skills and knowledge. As an example the American Society of Home Inspectors (www.ashi.org) requires a minimum of twenty continuing education credits each year. The housing industry is always changing and it takes ongoing education to keep up. Beware of an inspector whose knowledge is “stale”. Look for an inspector who spends time and money to upgrade their training.
Insurance – Insurance is a critical part of any business operation and never more so than in the field of home inspections. Along with General Liability to cover property damage caused by the inspector and Workman’s Compensation Insurance for injury on the job, Errors & Omissions Insurance is a vital component to the protection of the client, real estate agent and home inspector. Inspectors should be able to provide you a copy of their E&O policy upon request. If a home inspector does not carry this important form of protection, scratch them from your list!
Association Membership – While not required in most states, inspectors who have made the commitment of time, training, testing and money to belong to a professional home inspection society are generally more professional and concerned with doing a great job for your buyers. An association such as ASHI requires members to follow a nationally recognized Standard of Practice, adhere to a strict Code of Ethics, maintain continuing education, pass the National Home Inspection Exam (www.homeinspectionexam.org) and complete 250 fee paid home inspections to the Standards of Practice before becoming a full member. While not guaranteeing a great home inspection, referring someone from a nationally recognized home inspection association such as ASHI increases your chances for a quality home inspection by a qualified home inspector.
A proactive approach to choosing the right home inspector is to pre-screen each inspector with a comprehensive questionnaire. Below is a sample of a recommended letter and questions to ask.
Dear Home Inspector,
I recognize that a home inspection is an invaluable part of the home buying process. Whether performing a “Listing Inspection” for a seller who’s looking to make the selling process easier by avoiding last minute challenges or a Pre-Purchase Inspection for buyers as they seek to remove contingencies, a quality home inspection provides all the vested parties with the critical information they need while reducing liability for all involved. I am looking for up to 5 inspectors to recommend to sellers/buyers. If you would like to be considered for this list, please take a moment to answer the questions below. Feel free to provide any additional information that you think is relevant to stating your qualifications.
- What formal home inspection training have you received?
- What applicable background and experience makes you a good inspector?
- Have you passed the National Home Inspector Exam or other applicable national or state examinations? (identify others)
- How many inspections have you performed?
- How many years have you been performing property inspections?
- What applicable certifications or licenses have you earned?
- What professional associations do you belong to?
- Please provide proof that you currently carry General Liability and Errors & Omission Insurance?
- Please provide a copy of your inspection agreement/contract and a sample inspection report for review?
- Do you provide the client with the inspection report in the field at the time of inspection or later following the inspection?
- Does your firm have more then one inspector and if so will the person with the qualifications, experience and licenses identified above be performing the inspection, or another inspector who works for the company?
- Is the inspector available to answer questions after the completion of the report?
- When inspecting the attic and crawlspace (when applicable) do you enter and inspect the entire area or do you limit your inspections to the view from the access opening?
- Have you had any insurance claims or lawsuits within the past 5 years? If so, please explain.
- Does your firm also make repairs to inspected properties?
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The Texas Property Tax Year
By Lloyd Hampton
Now that we are coming into April it’s time to review the Texas Tax Year with our customers and clients. Property owners need to know when they are to receive their Notice of Value and when and how to protest the assessed value if they believe it to be too high. The Texas Tax Year flows like this:
January 1 All property in the county should be appraised.
Jan 1- April 30 Request tax exemptions for which you qualify.
May 15 Notices of Value should be sent out.
After May 15 Appraisal Review Board begins its hearings.
May 31 Deadline for property owners to file protest.
August-Sept Taxing units adopt tax rates for the year.
October-Dec Taxes may be paid.
January 31 Last day to pay tax without penalty.
February 1 Unpaid taxes are delinquent.
So now is the time to request homestead and other exemptions. Then, once a property owner receives the Notice of Value they are allowed to protest. First step is to file the “Notice of Protest” form with the County Appraisal District (CAD). This notice must be filed by May 31 or within 30 days of the postmark date if the notice is received late. Then a meeting is arranged with a county appraiser. Preferably, the appraiser and property owner agree to a value. If not, the next step is a formal protest before the Appraisal Review Board. If the owner still does not reach agreement then the next step can be arbitration on properties valued under $1,000,000. If the property owner does not wish arbitration or, if the value exceeds $1,000,000, the property owner may appeal the case to District Court. Property owners should seek the advice of a competent attorney or property tax consultant in making this decision.
Agents and owners should be aware that the Texas Supreme Court has ruled the property tax system in Texas to be unconstitutional. The legislature is currently in special session to resolve the problem and has been mandated by the Court to have a resolution by June 1. I will update everyone as new information becomes available.
This article is for informational purposes only and is not to be used in place of, or considered as, legal advice. Contact a competent real estate attorney with questions concerning specific situations. Mr. Hampton is a real estate broker, educator and consultant and is not licensed to practice law.
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How to Take a Vacation When Your Clients Need You
By Steve Oxman
When was the last time you took a vacation? I mean a real one. Not just a long weekend at the pool in your backyard (with cell phone handy), a massage session at a day spa, or a quick, required trip to a family wedding. When was the last time you traveled out of the country? When was the last time your cell phone was out of range for more than a week? When was the last time you really, truly, felt refreshed and restored?
Because real estate is a service profession, and because it’s commission-based, agents tend not to take time off. But studies have shown overwhelmingly that people who take regular vacations are more productive than those who don’t. Everyone needs to turn off for a while, relax, share an adventure, have fun.
The question is: how? There’s always a seller whose listing requires attention, a buyer who needs to start a new job and find a place to live by a strict deadline, closings to attend, escrow issues to negotiate, deals to hold together and problems to solve. If you’re successful, you’re juggling many transactions at once, and there’s never going to be a 2-week period that’s appropriate “down-time.” So you need to make that time and then manage your client base. The key is proper planning.
When is the right time?
Sure, there are natural times of year when the market is slower than others, but when the market is slow your clients often need even more of your marketing expertise and attention. So don’t wait to take a vacation until the perfect time for your business; there isn’t one. Plan the vacation for the perfect time for you and your family, and then make it work for your business.
Who will fill in for me?
The first step in making sure your clients are taken care of is selecting the colleague, or colleagues who will fill in for you. You want to choose experienced folks; this is not the time for testing out the skills of a new licensee. You should do that when you’re there to back them up, not when you’re out of reach. Consider a semi-retired colleague, someone highly experienced, reliable, and a calming influence who for personal reasons hasn’t been marketing for new clients.
When do I tell my clients?
The important element here is to make sure none of your clients feel blind-sided or abandoned at inopportune moments. About 2 months out, plant the seed for prospective clients and current clients you may still be working for. That far out, have it as part of the everyday conversation, not as a formal announcement. Ask them, “Have you ever been to Cabo? I’m taking my family there in March.” Then, about a month or so out, discuss it more specifically with clients.
How do I tell my clients?
Don’t send an email announcement – “Hey, I’ll be leaving the country and won’t be reachable.” This is something that needs to be done in person and in the right context. The fact that you’re taking a vacation needs to be immediately followed by the plan of action. Example: “I want to let you know that in a month I’ll be going on vacation with my family. I believe that if all goes as planned we should be in escrow at that point. I’ve arranged for (NAME) to handle anything that comes up during this time, and I’ll make sure you get a chance to talk to (NAME) when we get closer to the time. I’m sure everything will be taken care of ...” Keep a checklist of your clients you’ve told so you make sure not to forget anyone.
Tell clients when you’ll be unavailable, not when you’ll be leaving.
This is a great tip that more agents don’t consider that addresses one of those predictable truths: the time leading up to vacation is hectic, with packing and trying to finish up any transactions on the verge of completion or break-through. If you’re leaving on the 15th of the month, tell clients you’ll be unavailable starting the 14th. That will allow you to finish what you need to do to get away, and allows you to deal only with emergency issues if they come up.
How do I hand off my transactions?
If it’s possible, introduce your replacement colleague in person to your clients. If you can’t do that, make sure the replacement calls to touch base with them within the first couple of days of your absence. Clients should feel they are being serviced, that someone is there if they need something. Make sure you leave a thorough status summary of each transaction so the colleague can consult it.
How do I minimize the cost?
You need to think of your vacation as a mid-term investment in your business. Be aware, you are sacrificing short-term income for long-term mental health. Your vacation is a priority. That said, you want to do it properly, and to minimize the costs of travel and the impact on your business.
Long-term planning is key. You can’t do this right if you’re doing it on the spur of the moment. Unlike other professionals with regular full-time jobs and vacation benefits, independent contractors need to plan vacations further out for the sake of their clients. This has the added benefit of saving you money on airfare and hotel.
How reachable should I be?
That, of course, is up to you. Your clients should feel you can be contacted in a serious emergency. I recommend providing a single person, perhaps an assistant in your office, with a detailed itinerary with hotel phone numbers. Provide your clients and colleagues with that person’s contact information, to be used if absolutely necessary.
You can also establish dates when you will check your e-mail, so you’re not required to check it every day.
And, finally, even if you’re traveling domestically, you should turn off your cell-phone for the duration.
Remember, you’re on vacation.
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Home Buyers Are Bringing Back the Inspection
By Kirstin Downey, Washington Post Staff Writer
Saturday, March 25, 2006; F12
Like spring buds, home inspections are sprouting anew all over the area.
Home inspections faded from the market from 2003 until a good way through 2005, when sellers ruled the real estate world. Estimates show that in almost half of all transactions, buyers bidding against other buyers made their offers more attractive by dropping the home-inspection contingency from their contract offers.
Sellers reveled in this, because it smoothed the way to an easier closing, with fewer messy questions about whether the roof really leaked or the electrical system was up to snuff.
Now buyers are in a stronger bargaining position and they are insisting on inspections again.
"The market has slowed down for purchases, which is really good for home inspections," said Reggie Marston, owner and president of Residential Equity Management in Springfield. Marston said he performed 28 inspections in February 2005; this February, he did 35 to 40.
"It's the best I've done in the last three years," Marston said.
Arthur Lazerow, president of Alban Home Inspection Service Inc. in Frederick, also is seeing a big increase.
Another change, he said, is that listing agents are once again attending the home inspections, rather than just the buyer, the buyer's agent and the seller. These agents are trying to deal on the spot with questions when the inspectors find structural deficiencies.
Lazerow said many listing agents had stopped attending inspections because buyers seldom balked at problems. Now, he said, they are standing by, vigilant.
"They know it's more difficult to sell a house; each sale is more precious," Lazerow said. "It's like they are there to guard the house."
The pricing of home inspections has changed, too. In the past, when most houses had three or four bedrooms and two baths, inspectors charged set fees for their services, perhaps $250 per inspection.
But many houses have gotten much bigger, so many inspectors now charge a set fee, but then add a premium for additional square footage over a certain base level. Some houses are so big now that home inspections take two people to perform if they want to complete the review in a single day, Marston said.
Lazerow said the pickup in the home-inspection business has been slower in coming than he would have predicted. Many real estate agents are new to the industry, and they are not accustomed to telling their customers that getting a home inspection makes sense, he said.
"They've never done a home inspection, and now they are trying to learn what it is all about," Lazerow said.
Marston said many first-time buyers need to be informed about home inspections.
"Some of these folks are like ostriches -- they want to bury their head in the sand and say, 'I hope nothing goes wrong,' " he said.
Reprinted with permission from The Washington Post, Copyright © 2006.
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