The Condo Blogger

Here is an idea by guest contributor, Gene Marconi, to add a new option to our centuries old foreclosure process and help the market rebound instead of depressing it further.

A Foreclosure Process For The 21st Century

Connecticut’s foreclosure law has changed little in the last 300 years. Essentially, there are 2 types of foreclosures.

Strict Foreclosure is when the foreclosing party is awarded title after the foreclosed party has had an opportunity to redeem the property. Although there is a redemption period in strict foreclosure, redemption is almost never used due to an inability to obtain financing when one is under a foreclosure.

Foreclosure By Sale is when a committee is appointed who auctions the property. With foreclosure by sale there are no financing contingencies allowed, one must have a certified check for 10% of the appraisal price prior to bidding and typically, there is only an hour or two prior to the auction during which the property may be examined. The net result is that the bidding does not come close to the fair market value since bidders must take into account unknown problems with the property and the lack of time to properly inspect the property prior to bidding.

The reliance on colonial-era foreclosure procedures has several undesirable affects:

• Foreclosing lenders end up adding foreclosed properties to their portfolios and are forced to undertake the expenses of maintaining, insuring, and eventually selling those properties.
• The process exacerbates market down turns by dumping large numbers of foreclosed properties on the market thus depressing prices.
• The foreclosure by sale process shuts out first-time home buyers and those who would qualify for CHFA, FHA, VA, and other government backed mortgage loans since it is impossible to participate in the bidding without having cash available to complete the entire purchase.
• Foreclosed borrowers are deprived of any opportunity to generate a private sale at a higher price so as to either reduce any deficiency or preserve some portion their equity.

Another method is needed to reflect the complexities of purchasing real property in the 21st century.

The Solution Is Foreclosure By Private Sale.

Under this system, either party could ask for foreclosure by private sale. If requested, the court must grant it. The court would set a date at least 120 days from the date the motion is granted for the presentation of an offer to the court. The court would direct that the property be listed with a real estate licensee for sale at a commission to be determined by the court.

This would permit the party to be foreclosed to list the property and market it by normal means. If an offer is generated, that offer would be presented to the court for approval. That offer could include all of the normal and usual contingencies for financing, inspections, and other contingencies requested by the offeror and acceptable to the party being foreclosed.

This is not an unusual procedure. Probate and bankruptcy courts routinely oversee the marketing and selling of real estate by private sale. If the court approves the sale, the court would set a date within 60 days for the completion of the sale. This would allow a borrower to obtain a mortgage commitment, and set up and complete a closing.

Foreclosure By Private Sale has several advantages over current procedures:

• It permits a party being foreclosed to decide whether it is worthwhile to attempt to market the property privately.
• It provides for normal and usual marketing effort and exposes the property to the broadest possible market.
• It is faster than going through even a strict foreclosure when the foreclosing party must take back the property, repair it, prepare it for the market, and market the property.
• It is less expensive to the lender since the lender need not pay and arrange for appraisals, committees to auction the property or marketing expenses and sometimes damages from houses that have remained empty until they are sold.
• The party being foreclosed has an opportunity to sell the property for something that nearly approaches its market value without having to be under the gun of an imminent foreclosure.
• The buying public have an opportunity to purchase properties in what is for all intentions and purposes a normal manner allowing the potential buyer to perform due diligence and obtain the financing which is necessary for selling any property in the 21st century.

This procedure allows the market to function normally without having to suddenly absorb large numbers of foreclosed properties and will assist the market in rebounding quickly since large numbers of foreclosed properties will not be acting as a depressant on the market.

Attorney Eugene A. Marconi
General Counsel
Connecticut Association of Realtors, Inc.

By now, I am sure that you are aware that the next time you attend a yoga class, get a mani/pedi or have your dog groomed, you will be paying tax on the expenditure.  However, while local media outlets have devoted a significant amount of time to some of these “flashy” new taxes, I feel that one noteworthy tax increase has been largely ignored.  That is, the increase in the Real Estate Conveyance Tax.

With few exceptions, every seller of real property in Connecticut must pay a tax to the State and local municipality upon the transfer of the property.  The Conveyance Tax is separate from a capital gains tax, and is often overlooked by sellers when calculating the amount of their sale proceeds.

Currently, the State tax rate is 0.5% on residential dwellings selling for $800,000.00 or less, unimproved land and any residential property other than a residential dwelling.  A 1.0% tax is applied to sales of nonresidential property other than unimproved land, and the portion of the sale price of a residential dwelling exceeding $800,000.00.  Beginning on July 1, 2011, the State Conveyance Tax will increase by 0.25%, bringing the applicable rate to either 0.75% or 1.25%.  Municipal conveyance taxes are unchanged by the most recent budget legislation, and will remain at either 0.25% or 0.50% depending on the location of the property being conveyed.

Recent Fannie Mae condominium lending regulations are beginning to make condominium sales and project development more difficult. The changes were part of an effort by Fannie Mae and Freddie Mac to limit risky lending in a segment of the housing market particularly hard hit by foreclosures in recent years.

But perhaps not everything in the guidelines is bad. One requirement is that condominium/homeowners associations have at least 10% of their budgeted income designated in a capital reserve fund for replacement reserves and adequate funds budgeted for the insurance deductible.

Many older condominium associations keep inadequate reserves and operating budgets, so when major repairs or replacements are needed they must resort to special assessments.  These assessments are often substantial and it can be very difficult for some condo owners to come up with the money to pay them.

While these guidelines only apply to associations wanting FHA approval, if all associations adopted them, they would spare owners from such special assessments and thus they are a good thing.

Think you will be better off waiting for prices to drop further? What if interest rates increase? A 10 percent drop in the price of a home can be negated by just a 1 percentage point increase in interest rates on a 30-year mortgage.

The current market is a great opportunity for condo owners to move up. While you may get a lower price for your current condo, your savings on the purchase of a new condo may be greater still.  You may get $10,000 less on your $200,000 condo but save $20,000 on the purchase of a new $400,000 townhouse. Likewise, long-term, real estate is still a great investment. If the market you live in appreciates ten percent over five years, your $200,000 condo would increase in value by $20,000 while a new $400,000 condo would appreciate $40,000 over the same period.