Common Buyer Mistakes: Title Insurance

I often get asked for the most common mistakes buyers make, and there are many. One that is less well known is around Title Insurance. Title insurance is required if you have any mortgage on the property. There are actually 3 types, all of which are paid by the buyer. The lender's coverage (required), the owner's coverage (optional) and owner's "enhanced" coverage (optional.) Title insurance runs into the thousands of dollars and is often the majority of a buyer's closing costs at settlement. So what is Title Insurance and is there any way to save money on it?

Title Insurance is protection against claims against the property. You pay the premium one time, at settlement only, and it covers you for the length of time you own the property. Title insurance and the title search is coordinated by your settlment company. A title insurer does a title search--a review of Court House records to determine if there are any frauds, forgeries, or errors in the chain of title to the property you are about to purchase. It's common for documents to be misfiled or have errors, and your lender knows this. Therefore, they require you to purchase a lender's policy of title insurance to protect their interest in the loan. The lender's policy does not protect you. As you pay down your loan, there is no longer coverage unless you purchase the optional "owner's policy." It covers you in case someoen else turns out to own an interest in your title, there is fraud, forgery or duress, or defects int eh recording. While these events don't happen often, the cost of the optional owners policy is fairly minimal (about $1 per thousand of loan amount). You can also buy "enhanced" owner's (about 20% more than the standard policy) coverage that adds in things like being forced to remove a structure that encroaches on a neighbor's land, building permit violations, post policy forgeries and clouds on the title, violations of building setbacks, and insurance coverage even after the loan is paid off.

Some people argue title insurance is not necessary in most cases, and they're right. Things like homeowner's insurance aren't necessary most of the time, either, but people sure are glad when something goes wrong and they have that policy! Isn't that what insurance is...protection in csae you ever need it? For me the key is not whether to buy it (besides, the most expensive portion of it--the lender coverage-- you have no choice about anyway), the key is how to minimize the cost. And no, the answer isn't to shop around.

The key way to save money on title insurance is two words most buyers (and many agents!) don't know: Reissue Rate. A reissue rate--which you have to request--is a discount on the policy premium that is offered when a property has had another full title search in the last ten years. In this area, that's almost always the case. So say you're buying a condo from someone that has lived there 3 years. If you can get their title insurance policy number, then your title insurance company can partially rely on that search, and they only have to search the last 3 years, saving them time, and saving you money. How much money? Into the thousands of dollars depending on how much the property is worth (fees are charged as a percentage of the property value.) For most first-time buyers in this area, you can save about $500-800 dollars.

Make sure to ask your agent if they know what a reissue rate is and how to get one.

Impact of Sub-Prime: Part I

The Post has had a very interesting series of articles this week about the sub-prime mortgage market, which was the impetus for market drops across the world in the last few weeks. So how bad will it get? It's a question I often get.

What is a sub-prime loan? Basically it's a loan offered to a borrower who has been turned away bya traditional lender because of credit problems or other factors. Loans in this category often have a higher-than-normal interest rate. In the housing run up of the last 5-6 years, this type of loan was the only way many peopld could get into a house, and the fear is now those borrowers are defaulting and may be foreclosed upon.

The Post article notes that the problems so far have been concentrated in areas reeling from layoffs (remember the post about the job markets and it being a great leading indicator of the housing market?) such as Michigan, Indiana, Ohio, and the Gulf coast.

The Northeast, Southeast, and Midwest have a moderate 4-6% subprime loans in foreclosure as of Q4 2006. VA/DC/MD, Florida, and the West coast all have the lowest: 1-3% versus the US average of 4.5%. As the Post notes: "There is scant evidence-so far-that the mortgage problems are causing wider economic damage."

Of course that's not to say the problem can't be here next, but it's not here yet.

FAQ: Short Sales

With all of the recent press about the crash of the sub-prime lending market, we will be seeing more and more "short sales." What's a short sale?

A short sale occurs when a seller is in a negative equity position and either does not have the liquidity to sell (that is, they need to come to the settlement table with funds to cover their loss) or is facing foreclosure but wants to avoid it. This situation happens when the seller owes more on the property than it is currently worth. It's being "underwater" or "upside down" on the mortgage.

Lenders in this situation often cooperate with the seller because it will maximize their payoff to do that versus foreclosing and selling the property at auction. Upon settlement, the lender receives all of the net proceeds (less closing costs), which is called the "short payoff." The lender, despite being owed more money, releases the lien anyway and the buyer gets title. Lenders must agree to cooperate in this up-front, and contracts are contingent on lender approval.

Buy Now or Wait?

That's the title of an article that will run in Express (the Washington Post's metro giveaway publication) this April as part of a special issue on the Spring real estate market. How do I know? Because I'm one of the real estate agents that will be quoted in the article.

So how did I answer that question? Of course, "buy!" Well, I am in sales, after all. Though I don't have a crystal ball, I do have solid arguments for buying now.

First, for anyone who already owns and is considering trading up (or down), now is as good as ever. Your boat will rise and sink with the tide, so if you sell now (low), you'll also get to buy your next place low, so net net, you'll make out okay. And interest rates, hovering around 6% for 30 year fixed, are definitely in your favor.

For new buyers, if your personal situation (finances, where you are in your life, etc) call for buying, then I say do it. Over the last 30 years, DC real estate has risen on average 7% a year. Does that mean you are guaranteed this? Of course not. The investment should be considered "long term"--in this case, at least 3 years. If you're not going to stay there 3 years, don't buy!

The one thing I keep coming back to, and I mentioned this in my interview, is the local job market. George Mason University's Center for Regional Analysis does a fantastic analysis of the local job market and its impact on local housing, and the bottom line is that the job market is, and is projected to remain, incredibly strong. Jobs draw people to the area, and people need somewhere to live. The rental supply has shrunk over the past few years, so you can bet that rents aren't going down anytime soon. It's basic economics: demand for housing is going to go up. The supply of housing will not keep pace. That means higher prices in the long run. You can view the GMU studies here: http://www.cra-gmu.org/forecasts.htm and more specifically here: http://www.cra-gmu.org/forecastreports/2007%20Housing%20Market%20Forecast.pdf

Will the market drop a bit more? Possibly. Maybe even probably. But is it worth missing out on your dream house to save 0.1% more? (check the annual drops for the area...they aren't that dramatic after all.) And what if interest rates rise? And you're continuing to pay rent in the meantime? That's certainly money you're never going to get back, no matter how long you wait.

Condos versus Co-ops

For my first discussion, I want to talk a little bit about co-ops vs. condos. Co-ops are a very ,misunderstood piece of the real estate market. The basic difference is this: Co-ops are corporations in which you buy shares, in exchange for which you are given the right to occupy a unit. Condos are units that you buy, along with an undivided interest interest in the common elements (like hallways, courtyards, pools, and other amenities.) Though it may seem like a small difference, the implications are actually huge. You can see a further discussion of the differences on my web site here.

First, a disclaimer: I am just not a fan of co-ops. Something about having to get approval of a Board before you can buy property just rubs me the wrong way. And the captive financing--by which I mean you can only use the one or, if you're lucky, two approved lenders, who certainly know that if you want the unit you have to go through them (guess what that does to your rates?), well, it's just not in keeping with the capitalist spirit. The MBA in me bristles at it. Co-ops are almost always cheaper than comparable condos, and for good reason.

The financing is one disadvantage, but the biggest drawback I've learned of is the "land lease" co-ops. Here's how it works: when the co-op is formed, they only have a lease on the land that the buiding is on. It's usually very long term, say 99 years. River Place in Rosslyn is like this. Guess what happens when the lease is up? Everyone gets kicked out, and the building and all its improvements (that means your unit too!) revert to the LAND owner. You get nothing! It's just like having an apartment that you pay to remodel, but when the lease is up, your landlord gets it all at no cost. River Place's lease is up in about 50 years. That 's why the units there are so darn cheap compared to condos...they decline over time as the lease end approaches. I wonder whether people within the 30 year window at the end will even be able to get a loan? It will sure stink to be an owner in that window. Good luck trying to sell!

Welcome!

Hello everyone!

Welcome to my inaugural blog entry. In this forum, I hope to take questions, discuss the real estate market in the metro DC area, give advice, and sometimes just vent about my real estate pet peeves. Feel free to make a post. You can always contact me or learn more about me at www.katiewethman.com

Enjoy!