The rates are still staying low this week. We hit our lowest rates in over 37 years on Wednesday with a slight uptick in rates this morning. The 10 year treasury bill is trading at 2.10 this morning. Investors are still in dismay as they wonder how the banks continue to lend at the largest spreads ever on mortgages.

If we look at the spreads between the 10 year treasury and 30 year mortgages, I believe you can historically expect about a 180 basis point spread. So basically, you would add 1.8% to the 10 year treasury yield. Today the 10 year treasure is 2.1, hence our rates should be at 3.9% or so. The banks are currently at a spread of 275 or so over the 10 year treasury with rates trading around 4.875.

The investors for mortgage backed securities are demanding higher returns due to the risk of mortgages and the default ratios. The banks are also working on retrieving their losses by adding their spread to the treasury to rebuild their coffers. Make no doubt about it, the banks never lose!! The public will always pay for it in the long run. But, if they did just “absorb” the losses, they would become insolvent and then our money would be worth nothing. Banks are a for profit business and have to pay dividends to their investors. Therefore, the spreads will remain high until their balance sheets rebuilt.

Having said that, the rates are still fantastic and buyers are now coming out of the woodwork. Finally.

         Are you “On The Fence” About Buying a Home?

• It helps transform the mortgaged-back securities.
  This keeps access to capital for borrowers high and
  interest rates low.

• Conforming/jumbo conforming rates should drop in
  the coming weeks by as much as a percentage point.

• It improves confidence in the stock market allowing
  investors to once again realize profits, which they in
  turn can re-invest in mortgages.

• Credit will flow again bringing new, qualified buyers
  into the market to take advantage of the investment
  opportunities currently available.

• Modified mortgages will allow some homeowners to
  restructure their mortgages and avoid foreclosure.

If you’re on the fence, now is an excellent opportunity to realize
dramatic savings on a home purchase before the market shifts,
and we begin the next ‘UP’ stage of the cycle.

On CNBC’s Parting Shot on June 27, 2008 Dennis Kneale’s commentary tried to put some perspective on the reality of the housing crisis compared to the way the news media likes to glamorize doom and gloom. He provides a refreshing approach, rather than the gloom and doom that the media has provided. CLICK HERE to watch video.

Here is an outline of his talk.

1/3 of all homes are owned outright, no loans
1/2 of all homes were purchased prior to 2000 and have equity.
95% of homeowners are paying on time.
which leaves 5% or 4,000,000 of homeownes at risk.

Teledyne is a local high tech company here in Orange County. Owning their stock has made quite few of their employees and other local people Millionaires. I figured that everybody could understand making money this way. You simply bought Teledyne stock in the beginning and sold it after the price went up (way up).

Last Friday it closed at $65.17 per share. Back in March of ‘03 you could have bought some Teledyne stock for around $15.00. Now my question to you is, “Would it really have mattered to you if you had paid $14.50 or even $15.50? Sure, you want to make as much as you can, but if you had tried to “time the market” to buy it at $14.50 you might have missed it completely and had to pay upwards of $20.00 per share if you wanted in.

My advice to you is to buy when you can. Don’t worry about picking up every nickel off the table. Just get what you can. You would have gotten over 400% growth in the share price. Why be greedy? (more̷

The dynamics of short sales and REO transactions present distinct challenges to REALTORS® and Buyers. 

Short Sales

Short pay transactions or “short sales” are transactions where the seller owes more on his or her home than the home is worth.  The distinct nature of these listings enable a third-party  the lender to intervene in the terms of sale and the lender will dictate after a buyer may have had his offer on that home that the lender will want the seller to counter and
sell the home for more than was originally agreed to by the buyer and the seller.
This is possible, because the lender will have to discount the note, so although the seller has signed a legally binding
contract subject to lender approval of the short sale.

(more̷

There is more to a home purchase offer than the price. Ideally, the offer, including any counteroffers, should encompass all the terms and conditions that will apply to the purchase transaction.

In some states, attorneys draft purchase offers. In other states, like California, most residential purchase offers are filled out by real estate agents using pre-printed contracts that were drafted by attorneys. In either case, make sure to read the offer and understand it before it’s presented to the sellers.

In addition to the price and contingencies, the purchase offer should include such specifics as the deposit amount, the closing date, the date the sellers will deliver possession, any personal property such as a washer or dryer that is included, and any real property such as a light fixture that is excluded from the sale. It is best to be as specific as possible. (more̷

The housing market is soft. Hard times for some can mean opportunity time for others. Could now be a good time to step into the housing market and pick up a bargain?

Generally, it is a better time to be a buyer than a seller, but this is not so in every market. In San Francisco, for example, there are still more buyers than sellers for prime upper-end properties. You’re not likely to pick up a bargain there.

Many more markets are suffering from too much inventory and too few buyers. These markets would seem to offer the best opportunities. However, this is not necessarily so. Even though the price you pay is relatively low, it could take some time before the value of your investment increases.
(more̷

Copyright© 2008, CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) Permission is granted to C.A.R. members

Under contract law, a contingency provides a party to the contract the ability to condition performance on the occurrence or non-occurrence of another event.  For example, a buyer may condition performance under the real estate purchase contract on the outcome of the buyer’s inspection.  If the buyer is dissatisfied with the results of the inspection, then the buyer may cancel the contract without being held in breach of contract.  Another common example:  the buyer under a real estate purchase contract may condition performance on obtaining a specific loan (e.g., not to exceed 7.5% fixed rate and not to exceed 1 point).  After making a good faith effort to obtain such a loan, if the buyer is not approved for such a loan, then the buyer may cancel the agreement without being held in breach of contract.  A buyer of vacant land may want a contingency on city approval of building plans.

The are other types of contingencies.  One party may have a contingency that the contract be approved by an attorney or another third party.  With short sales, the contract is most likely contingent on lender approval.  Some sellers want to have a contingency of entering escrow on a replacement home before they are bound to perform on the sale of their existing home. 

This legal article focuses on some common contingencies arising in real estate sales transactions, in particular in C.A.R. Form RPA-CA (residential purchase contract), and the method for removing contingencies under the C.A.R. purchase contracts. 

I.  COMMON CONTINGENCIES IN RESIDENTIAL SALES TRANSACTIONS

Q 1.  Is there an inspection contingency in the C.A.R. residential purchase contract, the RPA-CA?

A Yes.  The buyer’s inspection contingency can be found in Paragraph 7A(i)(b) and arises from the contract language: “subject to Buyer’s investigations rights” and also the explicit language in Paragraph 9A, “Buyer’s acceptance of the condition of, and any other matter affecting the Property is a contingency of this Agreement….”  Paragraph 14B indicates by when the buyer must remove the inspection contingency (among others).  The default time is 17 days but may be contractually changed.

Q 2.  Can a buyer waive the inspection contingency?

A Yes.  There is no California law that prohibits the buyer from waiving the right to inspect the property.  However, sellers should be aware that whether the buyer inspects the property or not, the seller is still legally obligated to disclose all known material defects to the property.  (Lingsch v. Savage, 213 Cal.App.2d 729 (1963).)

Furthermore, for residential one-to-four properties, both listing and selling agents still have a duty to conduct a diligent visual inspection (Easton v. Strassburger, 152 Cal. App. 3d 90 (1984); Cal. Civ. Code § 2079).  See also the C.A.R. legal article, Real Estate Licensee’s Duty to Inspect Residential Property, found on http://qa.car.org.

Q 3.  Is there a loan contingency in the C.A.R. residential purchase contract, the RPA-CA?

A Yes. The loan contingency can be found in Paragraph 2 Section I.  There is a loan contingency unless Paragraph 2K or 2L is checked. There are two option boxes.  The default loan contingency period of time is 17 calendar days; the first box permits another number of days and the second box leaves the loan contingency in effect until the loan is funded.

It is recommended that buyer’s agents assist the buyer in completing Paragraph 2, Finance Terms, in the RPA-CA.  Even though, the buyer may not know what type of loan the buyer will be obtaining, it is important to insert a maximum interest rate and maximum points that the buyer would be willing to pay to obtain a loan.  If this paragraph is left blank, then the buyer has a obligation under the contract to accept any loan whatsoever or risk being considered as not acting in good faith under the contract.

Q 4.  What is the appraisal contingency in the RPA-CA?

A In Paragraph 2J of the RPA-CA, the contract default provides an appraisal contingency.  If the box is checked, there is no appraisal contingency.  This contingency differs from a loan contingency since it is quite possible for a lender to be willing to provide a loan even though the property does not appraise at the sales price.  For example, this might occur if the buyer is providing a substantial down payment and the loan amount is less than the appraised value.  Nevertheless, this contingency means the buyer need not proceed with the transaction, if the buyer will be paying more than the property appraises.  This contingency permits the buyer either to cancel or to renegotiate the sales price to reflect the appraised value of the property.

Q 5.  What other contingencies can be found in the C.A.R. residential purchase contract, the RPA-CA?

A The RPA-CA also contains other contingencies, contingency on sale of buyer’s property (Paragraph 13B and Form COP Paragraph A), approval of condominium/planned development disclosures (Paragraph 6B “Buyer’s approval of CI Disclosures is a contingency of this Agreement….”), tenant-occupied property agreement (Paragraph 3C(iii)), inspection reports (e.g., pest control, septic tank, wells) and disclosures (Paragraphs 4, 5, and 9A), insurability of the buyer and the property (Paragraph 9A(iv)), preliminary title report approval (Paragraph 12A), review of the sex offender database (Paragraph 9A(iii)), among others.

Q 6.  Are there any non-optional contingencies?

A Yes.  For residential properties built before 1978, federal law does require that the buyer be given a lead hazard information pamphlet, that the seller disclose the presence of any known lead-based paint and provide a statement signed by the buyer that the buyer has read the warning statement, has received the pamphlet, and has a 10-day opportunity to inspect before becoming obligated under the contract.  The buyer’s right to conduct a lead hazard inspection is a contingency of the contract required by federal law unless the buyer has had the opportunity to do so prior to execution of the purchase contract.

Furthermore in a residential one-to-four sales transaction, unless exempt, the seller must give the buyer the TDS and give the buyer the right to cancel within 3 days (or 5 days if the TDS was mailed to the buyer).  If the seller doesn’t give the buyer the TDS when obligated to do so, a California court has held that the buyer does not have to go through with the sales transaction. (Realmuto v. Gagnard, 110 Cal. App. 4th 193 (2003).)

Q 7.  Can a seller insist that the buyer have no contingencies?

A Yes, but only if the transaction is handled properly!  In a residential sales transaction, the law requires that the seller provide the buyer with certain disclosure documents.  See Question 6 for non-optional contingencies. 

However, the seller can avoid giving the buyer any disclosure contingencies by providing all the necessary disclosures prior to the buyer submitting the offer to purchase.  In addition, the seller would need to give the buyer the right to conduct a lead hazard inspection (for residential property built before 19 before binding the buyer to the purchase contract.

Q 8.  How is the contingency on lender approval handled for short sales?

A If a sales transaction will be contingent on lender approval, either the buyer can attach C.A.R. Form SSA (Short Sale Addendum) to the offer or the seller can counter the offer with the SSA.  The SSA which is used as an addendum to the RPA-CA (or other forms) indicates in Paragraph A that the contract is contingent on lender approval.

If the seller doesn’t receive written consent from all the lenders by the specified date, then either party may cancel the contract.

II. CONTINGENCY REMOVAL

Q 9.  How is a contingency removed?

A Under the requirements of the RPA-CA in Paragraph 14B(3), the buyer must remove all contingencies in writing using C.A.R. Form CR.  This form provides check boxes in Paragraph A1 giving the buyer the option of removing only particular contingencies.  Instead of using Paragraph A1, the buyer may check Paragraph A2 giving the buyer the opportunity to remove all contingencies except for the ones indicated by checking another box or boxes.  The third option is for the buyer to check the box for Paragraph A3 whereby the buyer removes all the contingencies in the contract without any exceptions.

If the seller is given a contingency on the purchase of replacement property (C.A.R. Form COP Paragraph B is checked), the seller must remove this contingency in writing according to Paragraph B2.  The seller may also use C.A.R. Form CR.  However, the seller would check one of the boxes under Paragraph B.  There is also a box for the seller to remove any other contingency which the seller may have under the contract.

Q 10.  Must a buyer remove a contingency regarding a disclosure that the buyer has not yet received from the seller?

A Even if the contingency period has passed, under the RPA-CA Paragraph 14B(3), the buyer is not legally obligated to remove those contingencies related to “(i) government-mandated inspections/reports required as a condition of closing; or (ii) Common Interest Disclosures” until 5 days after receiving those disclosures.  The buyer has the latter of the 17 days (if this default time is used) or 5 days after the seller gives the buyer the above-mentioned disclosures.

For example, if the contingency period ends on Wednesday, April 16th but the seller gave the buyer the common interest disclosures (HOA documents) on Tuesday, April 15th, then the buyer has 5 days from the 15th, until Sunday, the 20th at 11:59PM (under the RPA-CA contract “days” means calendar days), to remove this contingency without being in breach of contract.

On the other hand, if the contingency period ends on Wednesday, April 16th but the seller gave the buyer the common interest disclosures on Tuesday, April 9th, the buyer still has until April 16th to remove this contingency–not just 5 days but the full contingency period.

Q 11.  Do the additional 5 days discussed in Question 10 apply to the preliminary title report contingency?

A No.  If the buyer has not received the preliminary title report by the end of the contingency period, the buyer does not have an additional 5 days from receipt in order to remove this contingency since this is not a government-mandated inspection/report.  The buyer has the option of cancelling the contract or proceeding without it.  However,  the buyer may have legal remedies should the preliminary title report contain information having a negative impact on the buyer’s desired use of the property.

In Field v. Century 21 Klowden-Forness Realty, 63 Cal. App. 4th 18 (1998), the buyer successfully sued the dual agent for breach of fiduciary duty.  One mistake, among others, made by the agent was not making sure that the buyer received the preliminary title report prior to close of escrow.

Q 12.  What happens when the buyer doesn’t remove a contingency in writing at the end of the contingency period?

A Under the RPA-CA Paragraph 14C(2), the contingency continues.  In other words, the contingency remains as a contingency until it is removed or escrow closes.  Thus, for example, if the loan contingency is not removed by the buyer, it gives the buyer the opportunity to cancel the contract at any time during the escrow (assuming the buyer is acting in good faith in trying to obtain a loan) if the buyer cannot obtain the specified loan and the buyer is not in breach of contract.

Q 13.  What can a seller do if at the end of the contingency period, the buyer doesn’t remove the contingency in writing?

A Under the RPA-CA Paragraph 14C(4), the seller has the right to give to the buyer a notice to perform (C.A.R. Form NBP) which gives the buyer an additional 24 hours (the default period of time) to remove the contingency in writing.  If the buyer doesn’t remove the contingency, then the seller may cancel the contract in writing and not be in breach of contract.

Q 14.  Can the seller give a buyer the notice to perform (C.A.R. Form NBP) mentioned in Question 13 before the end of the contingency period?

A Yes.  The seller can give the buyer the NBP as long as two days before the end of the contingency period but not more than that.  However, giving the NBP earlier does not shorten the contingency period.

For example, let’s say the buyer has until Wednesday, April 16th to remove the contingency in writing.  Then the seller gives the buyer the NBP on Monday, April 14th which states that the buyer has 24 hours to remove the contingency.  The buyer still has until Wednesday, April 16th 11:59PM to deliver the C.A.R. Form CR to the listing agent or seller.

Suppose, in the same example above, the seller gave the buyer the NBP giving the buyer 24 hours notice on Wednesday, April 16th at 3PM.  Now the buyer has until Thursday, April 17th 3PM to remove the contingency in writing (by delivering the CR to the listing agent or seller).

Q 15.  If the buyer doesn’t remove the inspection contingency at the end of the contingency period, does this give the buyer the right to continue conducting inspections of the property?

A No.  Under the RPA-CA Paragraph 14B(1), the buyer has 17 days (the default period of time) after acceptance to “complete all Buyer Investigations….”  Although a seller may choose to give the buyer additional time to perform the buyer’s inspection, the seller is not contractually obligated to give the buyer more time.  However, the seller is obligated to give the buyer the NBP which simply gives the buyer 24 hours (the default period of time) to remove the inspection contingency not 24 hours more to inspect the property.

Q 16.  Is closing escrow a contingency of the RPA-CA purchase contract?

A No.  The closing of escrow is considered a covenant or condition under the contract to which both parties are bound.  If the seller delays the close of escrow (e.g., if the seller doesn’t execute the grant deed), then the seller is in breach of the contract.

If the buyer delays the close of escrow (e.g., if the buyer doesn’t deposit the balance of the monies or if the buyer doesn’t sign the loan documents), then the buyer is in breach of the contract.

What should a buyer or seller do if the other party doesn’t close escrow?  Either party can use C.A.R. Form DCE (Demand to Close Escrow).  In Paragraph 1 the seller is the one demanding that the buyer close escrow and in Paragraph 2 the buyer is one demanding that the seller close escrow.  After giving the DCE and the other party still refuses to close escrow, then it would be advisable to consult with an attorney to discuss all the possible remedies including suing for specific performance.

For additional information about contracts and remedies, see the C.A.R. legal article, Contract Law and Real Estate Transactions, found on http://qa.car.org.

Q 17.  What is meant by “active removal” or “passive removal” of a contingency?

A The term “active removal” used when talking about a contingency means that a party must do something to remove a contingency.  Typically this means removing the contingency in writing.  For “passive removal” of a contingency, the party need do nothing.  The contingency is automatically removed with the passage of time. 

The RPA-CA as well as all the other C.A.R. purchase contracts require active removal of the buyer’s contingencies.

Q 18.  What happens if a buyer removes all the contingencies and then discovers a material defect in the property prior to the close of escrow and wants to cancel?

A The answer to that question depends on many different factors.  One, if the seller was aware of the defect but didn’t disclose it to the buyer, the buyer may be able to cancel without breaching the contract.  Two, if the defect is visually obvious to the buyer but the buyer didn’t notice it other than during the walk-through, then the buyer may be held in breach of contract if the buyer cancels.  There is no clear cut answer to this question because it depends on the specific facts of each situation.

Q 19.  Where can REALTORS® obtain additional legal information?

A For additional information about contracts and remedies, see the C.A.R. legal article, Contract Law and Real Estate Transactions, found on http://qa.car.org.

This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.’s legal products and services, please visit C.A.R. Online at www.car.org.

Readers who require specific advice should consult an attorney. C.A.R. members requiring legal assistance may contact C.A.R.’s Member Legal Hotline at 213.739.8282, Monday through Friday, 9:00 A.M. to 6:00 P.M. C.A.R. members who are broker-owners, office managers, or Designated REALTORS® may contact the Member Legal Hotline at 213.739.8350 to receive expedited service. Members may also fax or e-mail inquiries to the Member Legal Hotline at 213.480.7724 or legal_hotline@car.org.  Written correspondence should be addressed to:

California Association of REALTORS®
Member Legal Services
525 South Virgil Avenue
Los Angeles, California 90020

One of the sings of an improving real estate market is “cherry picking.” What happens is buyers look for the best property they can find. It has the best location, best amenities, best upgrades, best landscape and most important-
best price. As these properties begin to be priced at a number that corresponds to the buyer’s specific set of parameters, homes start to sell. One by one, the really good deals begin to sell. As these homes begin to sell, other buyers, who waited too long, get nervous and decide they had better purchase also. Once all the “cherries” are gone, we then have the “dogs” that no one wants. They are priced the same as the “cherries,” but are inferior in some way.  As these properties begin to sell, the new market value for the neighborhood is set. This is the new fair market value which guides both buyers and appraisers. After all the “dogs” are sold, sellers who have been on the market for months and years have a decision to make. They must either drop their price to fair market value or take their home off the market. As this process begins, inventory will drop and won’t be replaced very quickly. Many sellers will not want to sell their homes for the lower fair market value. When those properties, owned by sellers who are motivated and are willing to take fair arket value, sell, the real estate market will begin to stabilize. Unless the government does something stupid, we will slowly get back to a normal market where prices are negotiated over 10,000 to 20,000 dollars within the listing price.

There will always be some properties in neighborhoods that will sell for more or less. This stabilization has happened after each of the other cycles in the 1970’s, 1980’s and 1990’s. Always remember the golden rule in real estate, “long term.” No one has ever been hurt by owning their own home for 20 years. That also means you don’t use your home’s equity as a savings account. If you kept the same loan on the property that you had when you purchased it 20 years ago, you’d have equity in your home and te value would be higher. Period.

1 Interest rates on long-term, fixed, and adjustable mortgages are at historically low levels. The rate on a 30-year, fixed mortgage is hovering just below 6 percent, while, by comparison, interest rates were hitting 8 percent and higher during the last market downturn in the late 1990s, and were between 10 and 12 percent at the height of the last housing boom in the 1980s. Lower interest rates make it easier to qualify for a loan, and your monthly payments are more affordable. 

2 No one can put a price on the intrinsic value of homeownership. Home prices also reflect financial worth and, the good news is, across California the median sales price for a single-family home has been consistently rising for several decades. In short, housing remains a solid, long-term financial investment. While the pace of home appreciation has slowed over the last year, historical data suggest home prices will continue to appreciate over time. The projected median home price for a single-family home in California in 2008, for example, is $553,000.
By comparison, the median price in 2000 was $241,350; $193,770 in 1990, and $99,550 in 1980. (source: C.A.R.)

3 The length of time a home remains on the market before it is sold has increased from roughly two weeks in 2004 to between eight and nine weeks in 2007. According to the unsold inventory index provided by the CALIFORNIA ASSOCIATION OF REALTORS®, it would take 16.3 months to sell all the homes on the market at the current sales pace, compared with 6.4 months in 2006. With more homes on the market for longer periods of time, you have more choices when it comes to selecting a home today. 

4 The multiple-offer frenzy that dominated the latest housing boom has subsided, and there is less pressure on today’s home buyers to outbid one another. REALTORS® in California reported that in 2007 only 28 percent
of homes sold had multiple offers, compared with 57 percent in 2004. (source: C.A.R.) 

5 The credit industry crisis that has made securing a home loan difficult for many has led to heightened scrutiny of mortgage lenders. As a result, state and federal agencies have created protections for home buyers that were not in place a year ago. The U.S. Federal Reserve, for example, has proposed a plan to require lenders to confirm a borrower’s ability to afford a mortgage before making a loan and establishing guidelines for explaining sub-prime loan terms in order to better educate buyers. Many new public education and awareness campaigns, such as Freddie Mac’s “Don’t Borrow Trouble®” campaign, have been developed to help you achieve the dream of homeownership without the financial risks that led so many borrowers into trouble in recent years. Buying a home in today’s market may be challenging, particularly for those with credit problems or little saved to put toward a down payment. But there are many factors impacting the current housing market that make buying a home today a viable option.