Saturday, January 4, 2020

First-Time Home Seller, Part II: The Finances

What is your plan financially?

When I teach classes for people on buying their first homes, one thing I would show was a chart for how much money you need and when you need it.  From the point of just thinking about buying (you may need $15-20 for your own credit report) to the costs of inspections, appraisals, earnest money, and the day of closing.  How long does that process go and when do you need money during those stages? Selling a home isn’t free either, and having the same kind of understanding will make navigating that far easier.

Many cities, Minneapolis included, have pre-sale inspection reports as a requirement.  The inspector may be either a city employee or just someone qualified to review your home for code issues.  In most cases, anything below code will then become the responsibility of the new buyer, sometimes to fix within a specified time period after taking ownership.  The idea is to have no items below that grade, which is another good reason to have a realtor who can help spot those before the inspection. The pre-sale inspections tend to cost between $200 and $500, and if you decide to do any repairs and have them reinspect for a cleaner report at the time of sale, plan on a small fee for a second visit. 

After your inspection and prior to listing, you may want to invest in a few things that will really help your home shine.  You won’t get a second chance to make a first impression, so it’s important to consider taking steps that will proactively address this; things like a professional cleaning service, staging your home with someone else’s furniture that’s nicer than yours, having pets stay in a kennel service, putting any unnecessary children up for adoption, etc.

For most homes in the Twin Cities, if they are in decent shape and priced well, an offer can be accepted within a week or so of listing - sometimes even sooner.  When the offer is accepted, the buyer will do their own inspection and may request other repairs. If you have a limited budget for this, then you can hold the line on an “as is” offer.  Just know that doing so could cost you money in the long run. The accepted offer will typically have a ten-day period during which the buyer can conduct that inspection and request additional repairs.  Those repairs don’t have to be completed prior to the 10-day window, but will need to be done before closing. Likewise, the buyer’s lender could require their own set of repairs as part of their review of the appraisal.  

It’s a good idea to understand exactly what the buyer’s lender will review when it comes to inspection documents regarding your property.  Many lenders will be fairly lenient in this regard and only require repair items if the appraisal says so. But the pre-sale inspection, the buyer’s inspection, the seller’s disclosure or any other repair items agreed to on the purchase contract, the online listing of the property, and even the title work can offer clues to a lender about the property’s condition.  Depending on the loan program, the lender, and the strength of your buyer’s application, any of those things could result in a required repair prior to closing. It’s best to make sure your realtor has a good understanding from the buyer’s agent about what a lender might look for, and then plan accordingly.

And then if you are moving into a new home and using financing to get there, you’ll need your own inspection, earnest money, and appraisal costs for your new transaction as well.  So a timeline looks like this.

Day 1. Pay for the pre-sale inspection of $200-$500.
Day 2 - 7. If any re-inspection is needed, be prepared to do the work and have the inspector out again.  $150 or so for reinspection, plus the cost of any repairs. You may want to invest in a professional cleaner ($100 - $500+ depending on how much work they do) or a professional staging service ($1,000 - $2,000+ also depending on how much of the home they stage).  
Day 8. Your property is listed for sale.
Day 15. Accept an offer!
Days 16 - 25. Put your own offer on a property, and be prepared to pay $500 for your inspection, $1,000 or more for an earnest money deposit, and $500 for your appraisal.  Be prepared to make any repairs required by the buyer. Those could be paid at the time of the work or at closing from your sale proceeds, depending on the contractor and amount or type of work.
Days 26 - 45. Sometime in this period, an appraisal will be done and the property will be reviewed by the buyer’s lender.  Be prepared to make repairs as needed from that review process. Those repairs might be payable from your closing proceeds, but at least a partial up-front payment should be expected.
Days 46 - closing.  Moving vans and any professional moving services or getting friends to help out.  Please be advised that federal law requires that beer and pizza be provided for any such services, regardless of how close of a relationship between you and the friends helping out.  These costs may be due prior to the closing day or could be paid at closing when hopefully you have enough in proceeds to cover it - especially the beer and pizza.

To be sure, you could pay for JUST the pre-sale inspection and hold the line on an “as is” sale, move things out using your own car and a pickup truck, then couch surf with a friend or family member until you find the next home.  But the reality is that selling your home and preparing for the next place to live can cost between $2,500 and $5,000 PLUS any repairs that need to be paid for during the sale process instead of at the closing table.  And the more you put those repairs or costs onto the buyer of your home, the less money the buyer is paying you at closing.

So getting ready to sell means at a minimum paying for a municipal inspection if your city requires one. Other costs may be optional depending on your next steps, and depending on whether you can defer those until your home sells. But getting the most out of your sale could cost you several thousand dollars up front.

Lesson seven: Talk to your realtor about pre-sale inspection costs, potential repairs and other sale costs, and make a plan for that prior to listing the home for sale.

Most home sellers moving on to another owned home are using the equity from the sale to get there. Instead of juggling the sale of your home with the financing and purchase of another, what if there is a different way to go about this?  In my case, there was and it’s called a bridge loan. Bridge loans fill a useful niche in the home selling and buying process.  First off, the home you’re selling is in kind of a gray area for getting a traditional loan. A full refinance comes with thousands in closing costs, so that typically isn’t the ideal way to access equity.  Home equity lines of credit have limited closing costs, but if your home is already on the market many lenders will not extend credit. The goal of most mortgage loans is to make money over time, so part of the property approval process is to check if the house has recently been or is currently listed for sale.

Furthermore, lenders will want to know about recent inquiries on your credit report, which can tip them off if you’re about to take on a new mortgage for the home you’re buying.  If you are moving to a different job market, then employment verifications will make it clear whether you will continue to occupy what is commonly referred to as the “departure residence” as your new home.  Even if you make it all the way to the closing table, boilerplate language on many such loans states that you intend to occupy the home as your primary residence for the foreseeable future. This should go without saying, but it’s generally not a good idea to mislead your lender on a mortgage loan.  In fact, doing so is rather illegal. Applying for credit under false pretenses can lead to a foreclosure proceeding even if your payments are on time, and may even result in civil or criminal penalties. So having all sorts of equity in the home you’re selling can be a case of “water, water everywhere, and not a drop to drink.”

And that’s where a bridge loan comes into play.  The bridge loan lender knows that they are putting either a first or second mortgage on real estate that is expected to sell within the next few months to a year.  Fees are minimal, but the interest rate is going to be higher than a market-rate first mortgage or second loan/credit line. And a bridge loan often has a balloon payment to it, usually twelve months.  What that gives you is a means to access home equity with minimal up-front or closing costs, at a slightly higher rate, and with a term that is expected to be short.

In my case, I had built up significant equity in the home I planned to sell.  I was moving to a market where home values were typically cheaper, at least for the size and location I wanted.  I was looking for a fixer-upper too, and although it had to be livable with a functioning bedroom, bathroom, and kitchen, my new home would likely not qualify to be secured by any kind of funding except a purchase-rehab or renovation-style loan.  I wanted more control over the restoration process than that financing would give me. And I could handle the increased housing expense. A bridge loan was absolutely the perfect mortgage product for my situation.  

Because I didn’t need to max out the available equity, my bridge loan was approved without the need for a full internal appraisal review.  That won’t be the case for everyone who goes this route, so be prepared for some additional out-of-pocket expenses if necessary. Appraisals can cost anywhere from $150 for an exterior-only review and $500 for a full interior site visit - more if your home is more than one unit.

When I started to look for financing options, one name came up pretty frequently for bridge loans.  Deerwood Bank does them and my lender, Brian Rubbelke, took excellent care of me. In fact, I tried shopping around and had a few lenders flat out tell me that they were unfamiliar enough with the process that they just recommended Deerwood.  If there is enough equity in your home to get you to your next place, a bridge loan is a great way to take some pressure off. That allows you to move your belongings from one place to the next without having to coordinate every piece of the transaction to happen back to back, sometimes on the same day.

Lesson eight: A bridge loan can be an ideal way to move from one home to the next, if the circumstances are right.

One of the requirements though is that this financing type has to be in first or second lien position.  If you’re selling for the first time, that usually means the property was one that you bought as a first-time homeowner.  You may have used some down payment assistance to get in the door. If so, be prepared for another set of tasks needed to clear those up.  Just like first mortgages, down payment assistance loans are often originated by one party and then transferred to a servicing entity after closing.  You’ll get the notice of transfer just like any financing entity is required to provide. But since assistance loans generally don’t have monthly payments to them, it’s far more likely that such notices get lost in the shuffle.

This can make it incredibly difficult to clear out any issues.  For instance, if your loan was forgivable over time, it’s likely that the satisfaction of the mortgage was sent to you and it was up to you to record it.  Have you ever recorded your own satisfaction of mortgage? I thought not. If you can’t find the original that was sent your way, you’ll need to request a new one from the appropriate party.  The key word being “from the appropriate party,” because this is where things can get really fun.

Here is a very much not hypothetical situation I went through.  Down payment assistance funds were allocated by the city of Minneapolis and contracted to a neighborhood group. The neighborhood group then picked an organization to administer the funds.  After closing, it wasn’t clear whether the administrator handed the loan off to another servicer or not. The neighborhood group eventually chose another administrator for future assistance loans, and the one that had my assistance package dissolved.  The funds like my loan were then overseen by the city again, although for at least some of those liens, they transferred authority to an entirely different servicer. To complicate matters even more unnecessarily, the city departments and the servicing entities are often staffed by a small number of people and don’t always have equally skilled backups when the person you really need to talk to is on vacation or medical leave.

Bear in mind what I was trying to do here.  My bridge loan needed to pay off this assistance lien.  So we had to find someone who as authorized to 1) confirm the actual payoff amount, 2) accept the payoff payment, and 3) provide the documentation needed to record the satisfaction of the mortgage.  This loan would have been forgiven if enough time passed, so the servicer had an additional motive for accepting my funds. Something that on the surface would seem simple when all you’re saying is, “I have thousands of dollars to give you, will someone PLEASE take my money?” took weeks to resolve. And given my knowledge of mortgage loans in general and community-based downpayment assistance in particular, there are few people with the skill set I had and that I needed to get to the bottom of my particular dilemma.  

"I don't know who you are. I do know what you want. If you are looking for a loan payoff, I can tell you I have money. But what I also have are a very particular set of skills, skills I have acquired over a very long career, skills that make me a nightmare for people like you. If you accept my payoff request now, that will be the end of it. I will not look for you, I will not pursue you. But if you don't, I will look for you, I will find you, and I will...still give you my money because otherwise I can't sell my home."
The existence of a down payment assistance lien combined with a bridge loan added one final mortgage-related quirk to my process.  In Minnesota, whenever a special assistance loan, like a deferred or zero-interest, zero-payment lien gets rolled into an interest-bearing loan, that transaction has to have a credit-counseling service sign off on the fact that the applicant has had a neutral third party review the situation.  I think this is a very good aspect of consumer protection, as it limits the ability of an unscrupulous lender to roll in deferred loans (either to increase fees and commissions or because it’s just more work to incorporate the right thing into the loan process). I was aware of that and built it into the process with my lender and with Powderhorn Residents Group to review my documents.  But if you’re paying off assistance then make sure you’ve located the correct party well in advance and you know whether credit counseling is needed. Build those steps into your sale process early, because finding out at the last minute will cause delays and cost money - maybe even cause the new purchase to fall through entirely.

Lesson nine: Know your home's title land loan/lien situations before selling, and plan ahead to resolve weird stuff if you have down payment assistance liens to deal with.

In my case, I took out a loan for about $63,000.  The payments were about $390 per month. That paid off my down payment assistance and gave me enough to buy my new home in cash.  I used personal savings to cover needed repairs on my new home, which came to about $10,000 prior to the Minneapolis house selling.  The additional mortgage payment was manageable. And I used a combination of personal savings and promises to pay from the sale proceeds to get my Minneapolis house into saleable condition.  That was about $3-5,000 in supplies and labor, plus up-front staging fees. Another $5,000 was paid at closing for the remainder of the work.

Selling my home and arranging for new living situations cost me roughly $20,000 - most of which was paid up front, with some divvied up after my sale closed. Being able to conduct the sale in the way I did made the move far less stressful and likely made me more money. I wasn't able to see what alternate-reality Jeff Skrenes did to sell his home, so I can't say for sure. A more conventional method would probably have cost me about a third of that figure out of pocket, netted slightly less on the sale, and resulted in a higher housing payment for the new home.

This was admittedly atypical.  Most people buy a turnkey home and spend little to nothing on immediate livability repairs.  Most people may not spend that much on renovation prior to a sale, but my home needed new interior paint and some new carpeting.  But I can’t describe the normal way of doing things because that’s not what I did. I was fortunate to have access to equity and enough personal savings to pull it off.  Not everyone will be able to do that, as it requires two housing payments and two rehab/renovation budgets for a while.

These costs are also why I found the proposed changes to the Minneapolis pre-sale inspection to be onerous.  Selling a home isn’t free and the higher costs are going to hit poorer people harder.

Last but not least, and coming much sooner, is the account of how I prepared the home for sale and my new home for occupancy.

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