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Posted On: 06/18/2008

Q:A friend currently owns a small house and is qualified to purchase a bigger house with prices being so low. He is planning to rent the small house but wants to know what will happen if renting conditions worsen and he is forced to give the small house back to the lender or the lender forecloses on the property. Will his new, bigger house be in danger of being taken by the other lender, will they take his savings, pay check, personal property?

A: A lender commonly has the right to seek a “deficiency judgment” in the event a mortgage debt is not fully repaid. With such a judgment, a lender could go after other owner assets and resources.

However, lenders do not typically seek such judgments for several reasons: First, it may require a lawsuit to obtain a judgment, and such suits are expensive. Second, state rules can make collection difficult or impossible: For instance, in California a “purchase money mortgage” used to acquire a prime residence is automatically a “non-recourse” loan, meaning that the lender cannot sue for unpaid debt. Third, a nonjudicial foreclosure – an auction on the courthouse steps – may limit the right of a lender in some areas to collect a deficiency judgment. Fourth, foreclosures often lead to bankruptcies, and that’s another quagmire for lenders. For specifics, your friend is best served by discussing foreclosure practices in his jurisdiction with a local real-estate attorney.

In addition to a deficiency judgment, your friend also should be concerned about his credit standing; it will plummet in the event of a foreclosure, whether or not there’s a deficiency judgment.

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Lastly, this purchase really needs to be thought through. Does it make economic sense? Not only in terms of qualifying for a loan but also in the sense of personal financial comfort.

Q: I have my home on the market and had a preliminary home inspection and it turns out I need to replace my roof. Estimates for this work have ranged from $5,000 to $10,000. I currently have three layers of shingle but no rotted wood. The current layers must be removed to install a new shingle roof.

Do you recommend that I replace the roof or offer credit to the buyer when the time comes? I want the home to look very attractive to potential buyers.

A: Please check your local building code. Does it allow you to have three layers of roofing? Roofing is very heavy, so typically only two layers are permitted.

You will likely need a “tear-off” to conform to building standards and the requirements of many standardized real-estate form agreements. If you spend the money now to do the work, you don’t know if a buyer will like your choice of colors or materials, and you don’t know how long it may take to sell the home. For these reasons, you may be better served offering a $5,000 credit to any buyer for the purpose of removing all current roofing and adding new shingles.

The catch, though, is that you may not have the option of offering a credit. Why? If you have a slow local market buyers will have a wide choice of properties. You want your house to be as competitive as possible so it doesn’t languish on the market, thereby costing you money each month for the mortgage and taxes and lowering the sale value. Some buyers may not be able to see past old roofing and may wonder what else is in need of repair. Before going further, speak with several local brokers to get their advice.

Q: How do you withdraw from a contract you no longer want?

A: In general terms, a “contract” can be seen as an agreement between two or more parties. Each party has certain obligations – in real estate, a contract typically means that a buyer will provide cash in exchange for a good, marketable and insurable title to a seller’s property.

Contracts can be dissolved with the mutual agreement of all parties. Also, because real-estate contracts are commonly contingent, they sometimes do not result in a transaction if one provision or another is unmet.

Failure to complete an agreement without the approval of all other parties or without a condition allowed in the contract can result in the loss of a deposit, damages, legal costs and even something called “specific performance” – a court requirement to complete the deal.

The bottom line: Before withdrawing from a contract have an attorney or legal clinic review the document to prevent an assortment of big costs and harsh penalties.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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