Home prices and interest rates are still low compared to where the market was before it crashed at the end of 2008. It’s created opportunity for new buyers, and buyers who are looking to resell a property for a quick profit.
My husband Demian and I are packing up our apartment. We’re getting ready to close on our first home any day now.
Buying wasn’t in our plans a year ago, but we got a little nudge after our landlord swore at us for wanting our water heater fixed. Plus, we kept hearing about how this was the time to buy: low home prices, low interest rates, a buyer’s market.
Five offers and more than 3 months later, we finally found our house. It’s a 100-year-old Victorian-style in the Avondale neighborhood on Chicago’s Northwest side. It's got a beautiful magnolia tree in the backyard, three bedrooms and 1.75 baths. The 0.25 is a toilet in the basement.
The packing’s on schedule, but then, just days before our scheduled closing, Demian gets a call. Our loan specialist tells him the closing’s postponed, indefinitely.
"The short version of it is they do have to get another appraisal," Demian tells me.
Now, delayed closings aren’t uncommon. But what’s delaying us is how we’re purchasing this house. When we put an offer on the property, it was listed as a short sale for $240,000.
A short sale can happen when an owner is coming up short on their mortgage loan and can’t pay the bank. Instead of foreclosing, the bank allows the owner to sell at a moderate loss. That hurts his credit less than a foreclosure would. Through a short sale, a buyer can get a house for a below market price, but it can take the bank months to take any action on the buyer's bid. Unless a cash offer comes in.
Our offer was up against five others including a bid from a cash investor. The bank accepted that investor’s bid.
"Cash investor is taking precedence here," says Mabel Guzman, president of the Chicago Realtors Association.
She says this isn't unusual.
"I worked with a client. We went through 5 separate offers to get to one that actually worked. He was competing really against cash investors," she says.
Banks like cash because it’s secure. Guzman says based on recent real estate data, 20 to 25 percent of transactions in Chicago are cash deals.
In our case, before the cash investor officially closed on the house, she asked us other bidders for our best offer. She accepted ours with lots of conditions. She wouldn’t make any improvements to the house. We couldn’t negotiate down price even if we found problems in the inspection.
"That’s what we call flopping," Guzman says.
Because we’re buying from the investor, we skip the typical slowness of the short sale transaction, but now we’re paying a higher price.
"I’m surprised the bank isn’t stepping in and saying you can’t do that. To my understanding in many states they have anti-flopping rules where you just buy it and get someone in place to sell it again," she says.
What she calls flopping, the U.S. Department of Housing and Urban Development calls flipping. In fact, it has an anti-flipping policy that forbids the resale of a property within 90 days of acquisition. The purpose is to prevent the rapid escalation of the price of a home. Turns out, HUD's waived its anti-flipping policy for some transactions this year to help move distressed properties through the market more quickly.
So here we are: the cash investor we’re now buying from never lived in the house and owned it less than three weeks before we took possession. But because she paid cash and we had to buy from her, we ended up paying an inflated price.
"Well, for one, I wouldn’t say inflated. Look, in terms of your neighborhood grocery store. They buy a gallon of milk at a discount," says Steve Smullin, a commercial investment real estate broker.
I asked him to explain these transactions from an investor's viewpoint. ASKED HIM TO EXPLAIN THESE TRANSACTIONS FROM AN INVESTOR’S VIEWPOINT.
"Now, is the grocery store an investor? They’re really just a middle man. Somebody who has bought something with the expectation of selling it to somebody else at a profit," he says.
Smullin says buyers don’t need to concern themselves with who they’re buying from. They just need to make sure the house doesn’t come with baggage.
"Other people’s business is other people’s business. Your ultimate concern is that you’re buying a piece of property that is not going to fall into a deep hole," he says.
After the closing stalled, Demian and I didn't know if we'd ever get the house. We put out an emergency conference call to our realtor and attorney.
At this point, we’ve already wired our 20 percent down payment which happens to be the majority of our savings. We know our money is theoretically safe, but it still puts knots in our stomachs to see the huge plunge in the bank statement.
"The nuances of this are incredibly frustrating for you guys," says our lawyer Matt Albrecht.
We discuss the possibility of starting the process all over again with another mortgage company, and the chance that more offers could still come in from other buyers.
That's because once our closing date is delayed, the investor has the contractual right to put the house back on the market while we’re working out the technicalities.
"If someone came in with 285 cash, I’m going to be rude here. If someone came in for 270 cash, they’d probably kick us out," he says.
Demian and I frantically make a list of people we could stay with if the house falls through. Our landlord certainly wasn’t going to let us stay. But before we could even come up with plan B, the roller coaster takes another lurch, and we’re suddenly cleared to close.
A day later, we’re doing our final walk through of the house with our realtor Jayne Alofs, making sure things are as we saw them when we put our original offer down.
Alofs tells us three viewings had been scheduled for the few days the house was back on the market. But not to worry, they were all canceled.
Now, the house is finally ours.
"I brought some salt because when you get into a new house, to take all the bad spirits and leave only the good ones for your happiness, we go in and we throw salt," says Susan Kogan.
That’s my mother-in-law bringing us a few home essentials and some good luck as we get started on painting the house.
By the way, we ended up buying our house for $285,000. The previous residents bought the house in 2005 for $380,000. Sounds like a bargain, until we found out the cash investor got it for $160,000.
"Through chaos there’s a lot of opportunity for folks," Guzman says.
Mabel Guzman with Chicago Realtors means opportunity for people like the investor we ended up buying from. But she also means us; people who couldn't have entered the market a few years ago when prices were much higher.
So in spite of the home-buying rollercoaster, I think we made a good investment. And best of all, we feel right at home.