“Title Insurance” Definition and Purpose … Why Should a Homebuyer Have it?

 

Anyone who has ever purchased a home or other real estate—especially if that purchase was made with mortgage financing—has seen an item on the Closing Statement entitled “title insurance.”  Most buyers do not really understand or appreciate what title insurance is, and why it is in their interests to have it.  Allow this blog post to provide a simple explanation.

 

After a buyer has contracted to purchase property, but before closing of that purchase and sale, attorneys will search and review the Public Records to make sure the seller has the right to convey title to that property, free and clear of all claims or liens.  If any claims (such as mortgages) or liens (such as claims of unpaid contractors for work done to improve the home) are properly recorded in the Public Records and identified by this “title review,” valid claims and liens will have to be paid at closing out of the seller’s proceeds, and the seller will be paid the balance of the purchase price remaining after such payments.  This process is designed to make sure that the buyer gets good and marketable title to the property, free and clear of any claims except claims made against the buyer’s own interest—such as any mortgage the buyer uses to complete the purchase.

 

What would a buyer do if the attorneys missed something in their title review?  What options would a buyer have if a lien is later claimed for work done for the seller, but that lien may not have been adequately preserved or “perfected” according to law?  Defending a lawsuit over such matters might be more expensive than paying the lien.  Suing the attorneys who made the mistake by failing to identify a valid claim might be another option.  But, again, lawsuits can be time-consuming, stressful and expensive.  Even if the buyer were ultimately to prevail, it might cost the buyer many thousands of dollars to get to the point of winning a case in court.  This is the purpose of title insurance.

 

Like most other insurable risks, it is common for buyers of real property to purchase insurance covering the risk that some claim or lien, whether valid or perhaps even invalid or frivolous, may be made against the buyer’s ownership interest in that property.  If a claim is made against the property, the buyer has the right to file a claim against that policy of title insurance; and the title insurer has the obligation to “take it from there,” whether that means defending against a claim in court or paying a valid claim so that it is released.  If the buyer purchased the property with mortgage financing, their lender required title insurance for these reasons.  The lender wanted insurance protecting its sizeable loan to purchase the property.  The premium for the “simultaneous issue” of an Owner’s Policy of title insurance is relatively small, and the homebuyer is well advised to pay that premium to make sure there is coverage for claims that might exceed the amount of the mortgage.  The most important function of title insurance is to provide legal protection of the buyer’s title to the asset he or she is purchasing.  An additional benefit is the peace of mind it provides.

For more information and to search the entire Charlotte area MLS FREE, go to www.EricDorerRealEstate.com.

 

Step One in Finding a Home in Any Market: Lender Pre-qualification

 

Many homebuyers enter the housing market without much of a game plan.  Some drive through neighborhoods looking for yard signs… some search the free web sites like Zillow (whose listings are usually neither current nor complete) and Homes.com … some buyers contact a realtor to find prospective homes and shuttle them around, but don’t really understand the offer or contract process.  In this highly competitive market—and really in any other market—STEP ONE in the process of finding a home should be securing pre-approval from a competent, competitive lender for any mortgage financing the buyer may need. 

 

There are several very good reasons for this.  First, the buyer needs to know how much of a home he or she can really afford and what sort of contract price he or she can realistically expect to close.  Who would want to spend hours, days and weeks looking at homes and eventually finding one you really love, only to discover you cannot secure the financing you need to make the purchase?  Equally troublesome would be finding a great home, then watching another buyer get it under contract while you attempt to get pre-qualified for your financing. Secondly, most sellers in this competitive market will not even consider an offer that is not accompanied by a mortgage pre-approval letter.  Why would a seller agree to put a home under contract and essentially take a property off the market unless he or she has some reasonable expectation that the contract will actually close?  Third, if there are issues that need to be addressed to secure loan approval (such as credit issues… debt-to-income ratio issues… etc.), the buyer needs to identify and address them BEFORE he or she finds a home, not afterward.

 

Further, it is important to choose a lender wisely and carefully.  The lender should be a member of the buyer’s “team”—someone the buyer can count on to get the transaction across the finish line.  The buyer should also be satisfied that he or she is being offered the best rate and loan repayment terms available to him or her.  Many buyers don’t know where to begin, so they visit the bank at which they keep a checking account and think they may have the issue covered.  Not so fast.  Lenders, and even individual loan officers, can vary substantially on things like rate and loan terms, but also on things like communications and efficiency of loan underwriting.  This can turn what should be an exciting home buying experience into an exercise in unnecessary stress and frustration.  Care must be taken to choose that lender wisely.

 

At Eric J. Dorer Real Estate, we have lenders we work with regularly.  We work with them because our experience has been good with them.  We know they are competitive, competent, professional and as painless as possible.  We receive absolutely nothing from a lender, nor do we want anything from them except a smooth, painless, successful transaction.

 

Step One in finding a home in this market or any other market is making sure you have your finances in order, and that involves getting a mortgage pre-qualification letter from a lender you feel confident will be a contributing member of your team in the home buying process.  Pre-qualification is usually a relatively quick and painless process involving review of the buyer’s credit, income and debt.  It can take as little as a day, and it costs nothing.  For all the reasons outlined above, failure to do this can ultimately mean frustration and failure in finding a home and getting it under contract.  Securing that pre-approval letter positions the buyer to take some control of the process and move forward to an orderly and successful home purchase.

Some Basics: What is a “Foreclosure”… and Why We Don’t See Many in the Current Market?

Those readers of this blog who may be new to real estate and the real estate market have often heard the term “foreclosure” and have come to believe it represents a special category of property that magically transforms every potential transaction that carries the label automatically into a great deal.  For those readers, let’s get back to some basics.  What is a “foreclosure?” 

 

Most real property is purchased using money borrowed from a lender.  That lender secures its right to repayment of the loan by way of a legal document called a mortgage—or a “deed of trust” in North Carolina, which is essentially the same thing.  In the event the buyer/owner of that property fails to repay the loan as promised (a situation called a “default”), the lender has the right to enforce its right to repayment according to the terms of the mortgage.  This legal enforcement process is called “foreclosure.”  It forecloses the borrower/owner’s right to the property and establishes the lender’s right to take title to the property in its own name and resell the property to satisfy the borrower/former owner’s debt.  When the foreclosure process has been completed and title is vested in the lender (usually a bank), the property is considered an “REO” or “real estate owned” by the lender. 

 

At the depths of the “Great Recession” in 2009 through about 2012 or 2013, the overall economy was in such precarious condition that the real estate market was flooded with foreclosed properties—REO’s.  Property values collapsed in most regions of the country—some, like Florida and Nevada—more than others. Due to lenders’ much more rigid underwriting of mortgage applications, many people who would have easily qualified for a loan to buy a home in 2006 found it impossible to secure loan approval in 2010.  This also drove market values down.

 

Many people who had bought homes during the boom years immediately before the Great Recession (also sometimes called the “real estate bubble”) found that they owed far more in mortgage debt on their homes than they were worth at the time.  Many of these people had also lost their jobs or businesses in the economic downturn, and many homeowners decided it made more sense to simply walk away from their homes than to continue to pay on mortgage loans that far exceeded what the homes were now worth.  The result of this was a flood of foreclosures and a huge inventory of REO properties entering the market for resale.

 

All of this put great downward pressure on property values.  It was at this time—roughly between 2010 and 2014—that “foreclosures” or REO’s really were generally synonymous with good deals.  Mortgage underwriting standards had become much more strict, and this further restricted the number of potential buyers who could take advantage of these generally good deals.  This assured that there were many more properties for sale than there were qualified buyers to purchase them.  It was a “buyer’s market.”  At that time, a buyer could pull up a list of REO’s on the HUD Homestore web site (HUD liquidates homes on which an FHA mortgage has been foreclosed) or the Fannie Mae site and find dozens of homes in any given city being held by these entities for resale.

 

Fast forward to our current market.   In 2024, foreclosures completed during the Great Recession have long been resold and absorbed back into the real estate market.  Searching www.HUDHomestore.com or www.Homepath.com for Charlotte, NC, reveals only a small handful of properties currently being held in inventory for resale.  Further, loan underwriting standards have again been relaxed somewhat, allowing more potential buyers to purchase homes again.  The overall economy has stabilized.  Many who lost jobs or businesses in 2009 or so have moved on, gotten new jobs or started new businesses; and put their lives back in order.  For some people, the Great Recession was a truly terrible time.  But most people have been able to move on in one way or another.

 

It is undeniable that there are far fewer REO’s and short sales (see the January 2019 edition of this blog for a discussion of short sales) in the current real estate market than there were between 2010 and 2014 or so.  Indeed, there are fewer homes for sale in general now than there were at that time.  There are also more qualified buyers in the market now than there were at that time.  Like the economy in general, the real estate market has largely stabilized away from the turmoil that characterized the Great Recession. 

 

So can we assume in 2024 that a foreclosed property up for resale (an REO) is automatically likely to be a better value than a similar or equivalent property that is not a distress sale?  The simple answer is ‘NO.”  Banks and other sellers of REO properties are also well aware that the real estate market has recovered.  They are also aware that there are far fewer homes in the market for resale than there were during the Great Recession.  So they price their REO resales accordingly to market.  In the current market, a seller who is simply motivated to sell and not necessarily under any distress may agree to a price that is actually a better value than a comparable REO property would be at its listing price.

 

The other issue with REO’s is the seller (the bank) is exempt by NC law from certain condition disclosures that other sellers are required to make.  The reason for this is the seller of an REO may honestly not know much about the condition of the home because they acquired it in foreclosure.  So they are quite unlikely to agree to any repairs.  The buyer in search of a bargain needs to be very careful about buying an REO property for these reasons.  What they think may be something of a bargain may be a money pit.  It doesn’t have to be, but a thorough home inspection during the due diligence period under the contract is an absolute must.  (A thorough home inspection by qualified inspectors is really a must in any purchase, but it is even more so when the seller is exempt from mandatory property condition disclosures by law.)

 

Are there fewer REO’s or “foreclosures” in the current real estate market than there were several years ago?  Yes.  Is an REO automatically a good value?  The answer is “no.”  Like any other home, an REO can be a good value, but the perception that it somehow magically represents good value simply because it is the result of mortgage foreclosure is most often a fallacy in the current real estate market. 

 

 

In This Real Estate Market, “Solid Research Identifies Great Opportunities;” and that Applies to Both Buyers AND Sellers

 

Even the passive observer of the current Charlotte metropolitan area real estate market has to come quickly to the conclusion that we are firmly in the grip of a “seller’s market.”  Inventory of resale homes, townhouses and condos is low, qualified buyers are many, and the net result can be multiple offers and contract prices that are bid up above listing prices. In addition, mortgage interest rates have been hovering in the 7% range for months, making home payments less affordable than they were only two years ago. Both buyers and sellers can be put off by this, like many people in somewhat complicated circumstances, choosing to “sit things out” until the market settles down a bit.  My response to the confusion goes back to our company motto: “Solid analysis identifies great opportunities.”

From the seller’s perspective, I would suggest that you take a deep breath and do your homework.  There is no need to jump quickly into the market, but there is also much to be gained by “selling high.”  You cannot know what “high” really is unless you research recent sales of nearby comparable homes.  In a quickly changing market, data from 6 months ago can be outdated.  And comparing the sale of a 1,400 sq.ft. ranch to a 2,200 sq.ft. two-story home—even in the same community—does not lend itself to accurate analysis or reliable conclusions.  The data you gather is only as good as the source you use to gather it.  Those “free” sites like Zillow and Trulia notoriously use outdated and incomplete data, and they refuse to disclose their methods for calculating estimates of value—those infamous “Zestimates.”  I would suggest that the reason they don’t disclose their method of calculation is because those “Zestimates” are very often wildly and notoriously inaccurate and misleading.  You can’t do serious analysis “on the cheap.”  Sellers often look to these sources to decide whether it makes sense to consider selling their home.  But if the information they get inaccurately leads them to believe they are unlikely to get a price sufficient to make a more attractive, they may pass on the notion and miss a great opportunity to improve their financial circumstances going forward.  Likewise, if the information they get inaccurately lead them to believe they can get a higher price than the market will truly bear, they can waste months, countless home tours and intrusions on your privacy trying to sell a home for an unrealistic price.  The decisions you make are only as good as the information on which they are based.  Solid research identifies great opportunities.

 

For buyers, the same principles apply.  You cannot identify a genuinely good value unless the data on which you are basing your conclusion is accurate and reliable.  Emotion may play a role in any purchase decision, but in my view, the primary motivator should be the conclusions you reach after careful analysis.  This is how you identify truly good opportunities.  The data—the numbers—don’t lie.  Regardless of the fact that we are currently in the midst of a traditional seller’s market, good opportunities always present themselves—if you have the ability to identify them.  As the saying goes, “keep your powder dry.”  Make sure you are pre-approved for your financing so you know what you can afford and so you have a pre-approval letter to submit promptly with an offer.  Don’t get discouraged, and position yourself to move quickly on the good value when you identify it.  Again, it is solid analysis that will identify the great opportunity.

 

Of course, I work hard with both sellers and buyers to make sure the information that leads to some of the most important decisions they make in their lives—choices on when to buy and when to sell a home or investment property—are based on current, accurate information and solid analysis.  I would be more than happy to help you.  You can search the entire Charlotte area real estate market free of charge or obligation on my web site: www.EricDorerRealEstate.com  And when you are ready for more personal attention, please don’t hesitate to contact me.  Identifying great real estate opportunities is what I do all day, every day.  I would be happy to do it for you.

Solid Analysis Identifies Great Opportunities - Education and Preparation Lead to Success

Like most things in life, education and preparation go a long way toward success.  That is certainly true in real estate investing, whether the investment is a home for fast flip or a home in which to raise the buyer’s family. You can begin to prepare yourself to buy or to sell by researching the market using free sources, such as my web site, where you can search the entire Charlotte area MLS system for homes, condos, townhouses, land and much more. Some people are mystified by what seems to be the complexity of property analysis… or financing options… or the seemingly endless other factors that can make or break a good property investment.  If you are starting with little knowledge, my strong suggestion would be to “form alliances” with industry savvy professionals—knowledgeable, ethical people in whom you can trust and have confidence.  Don’t allow the complexities to overwhelm you.  It often costs little or nothing to do this, and this can save you a huge amount of time, stress, frustration and, yes, money.

 

Likewise, as the old saying goes, “a little knowledge can be a dangerous thing.”  Having some experience in the Florida real estate market may provide some foundation for principles that can carry forward to the Charlotte market, for example.  But if you are not fully familiar with the current Charlotte metro area market, by all means educate yourself.  Or engage the services of someone who has intimate, current knowledge of that market, and possesses the tools to dig more deeply into the specifics of properties that you may find interesting as you discover those properties during your search.

 

Having practiced law in Florida for more than 20 years before moving to this beautiful Charlotte area, I encountered enough complex situations to feel at ease navigating the troubled waters of foreclosures and short sales, for example.  But I also learned that things are constantly changing.  Laws change… areas change… market values change.  It is therefore imperative that you make sure the information upon which you make the most important investment decisions of your life be current and accurate.  There can be enormous risk in thinking that you can adequately prepare yourself for such a transaction by reviewing free online real estate web sites.  Education and preparation are rarely adequate when done “on the cheap.”  

 

Our company motto is, “Solid analysis identifies great opportunities.”  Without adequate education and preparation, solid analysis is impossible.   

 

Research, Preparation, Speed and Perseverance Are Essential in the Current Real Estate Market

In case you hadn’t noticed, this continues to be currently “Sellers’ Market” in real estate.  The main reason for this is the inventory of homes for sale continues to be very low, giving buyers less to choose from as they compete for opportunities.  This is certainly true in the Charlotte metropolitan area and in many regions of the country.  Of course, sellers love it.  It is possible to “push the envelope” on price by listing a home at or above the most recent comparable sales and watching buyer interest continue, almost unabated.  There is a limit to this, and sellers who price their homes unrealistically high will see interest diminish and may encounter problems getting to closing, if the home does not appraise at the contract price, for example.  Nearly historically low inventories of resale homes are fueling this market; and this lack of inventory and abundance of buyers is concentrated more in the lower and middle price ranges than it is at the higher end of the market.  But it continues to cause challenges and frustration for many buyers.  However, there are ways to deal with it.

 

First, research is more critically important than ever in this market.  Buyers need to work with an agent who has access to the current database of comparable homes for sale and comparable homes sold.  Those free public databases like Zillow and Trulia won’t help you here because they are neither current nor complete.  When a buyer identifies a home he or she is interested in, the agent should prepare a quick “Comparative Market Analysis” of the home to see what else is currently available, and even more importantly, what comparable nearby homes have recently sold for.  If the listing price of the home you are interested in is unrealistically high, make an offer that makes sense in the context of “the comps.”  If that means you lose the home to other interested buyers, so be it.  Let them overpay for the home and move on.  Don’t get caught up in the frenzy of buyers competing to get a home under contract at any cost.  Set a ceiling price above which you will not go.

 

Secondly, make sure you are prepared to make an offer.  This involves getting preapproved for the mortgage financing you will need.  Not only does this give you some certainty on what sort of home you can truly afford, it also results in the issuance of a “Pre-approval Letter” by your lender.  This letter can then be attached to any offer made, and this tells the seller they are dealing with someone who is serious-- ready, willing and able to close the purchase.

 

Third, be ready to move quickly when you have identified a property that makes sense.  You and your agent have done your research, and you are armed with your Preapproval Letter.  With inventory as low as it currently is, when a home enters the market at a reasonable price, you should be aware that you are likely not the only buyer who has noticed it.  Try to get out to the house to view it as soon as you possibly can.  This may require some flexibility in your schedule and that of your agent.  But a delay in seeing the home and making your offer can mean the difference between an accepted offer and having a multiple offer situation in which you are essentially bidding against other buyers for the home.   

 

Finally, persevere.  Keep at it.  Don’t get discouraged.  Every buyer who has beaten you to a house you wanted is someone who has been competing against other buyers, just as you are.  But he or she kept at it until he or she got a home under contract at a price that made sense.  This real estate market can be frustrating and discouraging to a buyer.  But mortgage interest rates remain very low and, in most cases, it can cost less to own a home than to rent one.  Moreover, paying down a mortgage over time enables the homeowner to build equity and wealth the renter obviously does not build.  Even in this tough market, the reward is still there for those who do their research, prepare themselves, act quickly and decisively and persevere. 

For More information and to search the entire Charlotte area MLS database for homes, condos, townhouses, etc. FREE, go to www.EricDorerRealEstate.com

Back to Basics: What is a “Foreclosure”… and Why Don’t We See Many REOs in this Market?

Those readers of this blog who may be new to real estate and the real estate market have often heard the term “foreclosure” or “REO” (“Real Estate Owned” by a bank after foreclosure) and have come to believe it represents a special category of property that magically transforms every potential transaction that carries the label automatically into a great deal.  For those readers, let’s get back to some basics.  What is a “foreclosure?” 

Most real property is purchased using money borrowed from a lender.  That lender secures its right to repayment of the loan by way of a legal document called a mortgage—or a “deed of trust” in North Carolina, which is essentially the same thing.  In the event the buyer/owner of that property fails to repay the loan as promised (a legal situation called a “default”), the lender has the right to enforce its right to repayment according to the terms of the mortgage.  This legal enforcement process is called “foreclosure.”  It forecloses the borrower/owner’s right to the property and establishes the lender’s right to take title to the property in its own name and resell the property to satisfy the borrower/former owner’s debt.  When the foreclosure process has been completed and title is vested in the lender (usually a bank), the property is considered an “REO” or “real estate owned” by the lender. 

 

At the depths of the “Great Recession” in 2009 through about 2013, the overall economy was in such precarious condition that the real estate market was flooded with foreclosed properties—REO’s.  Property values collapsed in most regions of the country—some, like Florida and Nevada—more than others. Due to lenders’ much more rigid underwriting of mortgage applications after the mortgage meltdown in 2008-2009, many people who would have easily qualified for a loan to buy a home in 2006 found it impossible to secure loan approval in 2010.  This also drove market values down.

 

Many people who had bought homes during the boom years immediately before the Great Recession (also sometimes called the “real estate bubble”) found that they owed far more in mortgage debt on their homes than they were worth.  Many of these people had also lost their jobs or businesses in the economic downturn, and many homeowners decided it made more sense to simply walk away from their homes than to continue to pay on mortgage loans that far exceeded what the homes were now worth.  The result of this was a flood of foreclosures and a huge inventory of REO properties entering the market for resale.

 

All of this put great downward pressure on property values.  It was at this time—roughly between 2010 and 2014—that “foreclosures” or REO’s really were generally synonymous with good deals.  Mortgage underwriting standards had become much more rigid, and this further restricted the number of potential buyers who could take advantage of these generally good deals.  This assured that there were many more properties for sale than there were qualified buyers to purchase them.  It was a “buyer’s market.”  At that time, a buyer could pull up a list of REO’s on the HUD Homestore web site (HUD liquidates homes on which an FHA mortgage has been foreclosed) or the Fannie Mae site and find dozens of homes in any given city being held by these entities for resale.

 

Fast forward to our current market.   Going into 2024,, foreclosures completed during the Great Recession have long been resold and absorbed back into the real estate market.  Searching www.HUDHomestore.com or www.Homepath.com for Charlotte, NC, reveals only a small handful of properties currently being held in inventory for resale.  Further, loan underwriting standards have again been relaxed somewhat, allowing more potential buyers to purchase homes again.  Moreover, mortgage interest rates have increased substantially in response to the latest economic crisis—the inflation created by huge government spending after the COVID-19 epidemic. The overall economy has stabilized somewhat, but this combined with government overspending and the spike in mortgage interest rates have created a shortage of homes available for sale and a “seller’s market,” rather than the “buyer’s market” that existed immediately following the Great Recession.  Many who lost jobs or businesses in 2009 or so have moved on, gotten new jobs or started new businesses; and put their lives back in order.  For some people, the Great Recession was a truly terrible time.  But most people have been able to move on in one way or another.

 

It is undeniable that there are far fewer REO’s and short sales (see the January 2019 edition of this blog for a discussion of short sales) in the current real estate market than there were between 2010 and 2014 or so.  Indeed, there are fewer homes for sale in general now than there were at that time.  There are also more qualified buyers in the market now than there were at that time.  Like the economy in general, the real estate market has largely stabilized away from the turmoil that characterized the Great Recession.  In some ways, the market is worse than it was during the Great Recession, due to that lack of inventory and much higher mortgage interest rates.

 

So can we assume in 2024 that a foreclosed property up for resale (an REO) is automatically likely to be a better value than a similar or equivalent property that is not a distress sale?  The simple answer is ‘NO.”  Banks and other sellers of REO properties are also well aware that the real estate market has recovered from the Great Recession.  They are also aware that there are far fewer homes in the market for resale than there were during the Great Recession.  So they price their REO resales accordingly to market.  In the current market, a seller who is simply motivated to sell and not necessarily under any distress may agree to a price that is actually a better value than a comparable REO property would be at its listing price.

 

The other issue with REO’s is the seller (the bank) is exempt by NC law from certain condition disclosures that other sellers are required to make.  The reason for this is the seller of an REO may truly not know much about the condition of the home because they acquired it in foreclosure.  So they are quite unlikely to agree to any repairs.  The buyer in search of a bargain needs to be very careful about buying an REO property for these reasons.  What they think may be something of a bargain may be a money pit.  It doesn’t have to be, but a thorough home inspection during the due diligence period under the contract is an absolute must.  (A thorough home inspection by qualified inspectors is really a must in any purchase, but it is even more so when the seller is exempt from mandatory property condition disclosures by law.)

 

Are there fewer REO’s or “foreclosures” in the current real estate market than there were several years ago?  Yes.  Is an REO automatically a good value?  The answer is “no.”  Like any other home, an REO can be a good value, but the perception that it somehow magically represents good value simply because it is the result of mortgage foreclosure is most often a fallacy in the current real estate market. 

For more information and to search the entire Charlotte area MLS database FREE, go to www.EricDorerRealEstate.com