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Solutions for Closing Real Estate Deals in 2020 Edition 1  XML
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Joined: 06/17/2014 09:32 PM EDT
Messages: 5182
Location: Carmel, IN

Bad News Real Estate Agents: Things are about to get a little weirder.

Here's the good news: Real Estate Deals are Still Happening (and they won't stop).

With very limited exceptions (CoronaVirus Executive Order Related), even in states with substantial outbreaks in the Virus that has left our March 2020 in an economic lull, Real Estate has been considered an "essential" service. Adjustments have been made no doubt and some of those adjustments might stick with us beyond the crisis largely marked by a lack of information. All of this will pass of course and a new "normal" will be established. There hasn't been an exception to this rule in all of history including times when viruses and plagues and cholera made it so your chance of living to age 5 was as little as 75%.

I don't mean to scare you, because this latest virus isn't that. If you want to read up on the Victorian Era, the 1918 Flue, or any other historic pandemic for that matter...there's Google and Netflix and at least for right now you may have some time to do that. Try to enjoy it, and let's get back to the reality for a moment that liquidity, job markets, mortgage qualifications, the average savings of the average American, how we live and how we work is all about to change. If anyone tells you they know exactly where all of this is going they're simply guessing, I can assure you of that, but the path to simply "resetting" to where we were a month or two ago is an impossibility.

We've been here before.

In the wake of the financial collapse of 2008/2009 (and yes, it definitely went into 2009 if you were in real estate especially!), people still moved. Some of them lost substantial amounts of equity, some closings were seeing substantial delays, but overall it was sort of "business as usual" for us in the transactional real estate business. The shift for all of us in real estate was to focus on clients needs and maintaining our businesses so we learned to deal with short selling and how to attract investors as clients. Many of us spoke to more employees of banks than we had ever before. Some of us found ourselves counseling some very distraught people that had lost a substantial part of their nest egg. It was uncomfortable, it was a change, but in the worst of times everyone still needs a place to live and while the transaction volume can certainly go down (and it did), it never goes to nothing. In fact, it never even comes close to nothing.

Be Savvy.

I'm not using that word simply because of the title of my book for Real Estate Professionals ( http://www.TheSavvyAgent.net ), I'm telling you it's time to get real attentive to not just the marketing side of the business and the realities that will come from the potential of some level of long term "social distancing". That means getting ahead of every transaction in every way possible. Dotting your i's and crossing your t's as some may call it, but a level of diligence and timeliness that leaves you prepared when some "weird" stuff starts popping up. And it will.

The "Weird" stuff has already started.

Don't think for a moment that I was speaking generally above. We're already seeing it and for those of you that are average agents in the 8-12 transactions per year category you may get lucky and never even run into a speed bump. For those of you with massive teams and closing 100 deals...you're going to run into issues beyond what you already do. At just over 483,000 transactions last year alone where we were involved as the Home Warranty Provider ( http://www.RealWarranty.net ), the home inspection side through a variety of products, or environmental testing, we tend to see it all and first.

Here's an example and one we've already seen on several occasions: "The Builder no longer can deliver on a third party warranty"

This isn't exactly Real Estate 101, but for the sake of brevity let's assume you are in a contract right now for a new construction home with a low volume builder. Financing is done, home is within months of completion or was recently completed, you're on your way to closing when for one reason or another you now no longer have a builder that is capable of delivering a third party backed home warranty for structural issues. The reason could be that the builder is going out of business or their warranty provider just disqualified them for underwriting reasons that are insolvable in the short term. I'm not going to go through all of the reasons this could happen or all of the regulatory issues surrounding it because it's going to bore you, but suffice it to say you have two potential issues at that point;

1. Your client just got a little anxious (and the economy is a little shaky so they didn't need that!).
2. Financing was contingent upon the Builder's Warranty.

Of course you could have both issues and likely would if #2 was a problem, but nevertheless let's divide and conquer because this question is about to come up quite frequently.

Let's start with #1 and assume that #2 either isn't at issue or can be resolved. So you have an anxious client that just got the news they won't be getting a Builder's Warranty backed by a third party. There's a reality there, especially in a questionable economy, that the Builder (aka "General Contractor") in this case may not be around to resolve a workmanship issue or a failure that occurs within a short period of time. The same goes for the subcontractors that were on the job - the Third Party Warranty solves for this by putting a financial obligation on an entity that isn't a local builder or a plumber for example. This inherently takes away from the value of "buying new", and people have a pretty good understanding of what that means in terms of cars so they make very fair analogies to the home situation. They are now buying in some ways a Suzuki car, brand new, the day after they stopped making cars. What's worse yet is that the lack of that Third Party Warranty just made resale, if the home is within price points for government backed, conventional loans for the area, potentially problematic if mortgage underwriters for a buyer (if they chose to sell in the short term) asked for the Third Party Warranty.

It's quite a pickle you might say.

Your choices are simple:

- Walk
- Renegotiate

While evaluating those options with your client, keep in mind structural issues aren't necessarily commonplace and there are ways to mitigate risk. Namely, a home inspection. I'm not referring to the local code inspection, I'm talking about a professional home inspection. If you get the right one it will come with a free one year structural warranty and a five year roof leak protection plan from Residential Warranty Services, which serves quite well as a surrogate for at least some of what was being offered in the typical Third Party Builder Warranty packages. You could also escrow some reasonable amount until the time of the "One Year Walk Through" and here's an incredible tip...have the home inspector inspect it again in addition to the Builder's typical walk through.

That's about as protected as you can get, so ask your Inspector if they offer the 5 year roof leak protection plan and the NXT Structural Warranty, and the conversation with the buyer can go a lot easier. (These coverages apply to existing homes as well, but I bring it up in this context because it has saved a few new construction deals as of late and that number will only increase...but yes both of these coverages are available on existing homes and give buyers real peace of mind that you should make sure they have on every deal candidly and they're available free with inspection in every market.)

Now let's say your buyer has a HUD backed loan. As part of the New Construction Underwriting, they're going to be looking for that Third Party (and HUD approved) warranty. By the way, here's the limits for those mortgages that would apply here:


There's only 3 potential options, in this case, that could save that deal.

1. The Underwriters don't notice (it could happen!)
2. The Underwriters approve an exception (unlikely...most of them want to stay employed)
3. You switch financing types NOW.

I almost hesitate to tell you this because I hate killing hope...but the #2 solution noted above is likely futile. #1 may happen, but when there's a known deficiency and you're heading to a closing table you don't want that one to pop up at the last minute. Not to mention the questions later if they do have a problem and you're suddenly having to answer to questions like, "So when you convinced your client to ignore this issue to get financing fraudulently...". Yeah, not good. Either switching to an alternative financing type (non-HUD backed) or at least having it in your back pocket, even though likely a bit more expensive for your client, is prudent. Not only would it be prudent to explore those options, but it would be prudent to go back to some of the points above and utilize that increased cost in the efforts to negotiate something off of the price. Keep it reasonable of course and advise your clients to refinance out of any loan with a higher interest rate as soon as practical, but if they understand the risks and costs and you can advise them on mitigating those in every way possible, you may just save the deal and help another buyer achieve their dream.

In case your client wants to use the financing excuse at that moment, they could walk of course and go on to the next one. The earlier they make that determination the better of course for all parties.

This of course won't be the only thing that will be messing up deals over the next 12-24 months, so we'll be posting right here as the "new normal" continues to present itself.

Stay Healthy most of All and if you find yourself in a transaction with an unusual problem, feel free to email your story to NThornberry@rwswarranty.com. You will get a response!
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This message was edited 3 times. Last update was at 04/03/2020 07:34 PM EDT

P. Nathan Thornberry
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