This is going to sound insane, but hiring a lawyer to look at your condominium’s governing documents is usually cheap. There are many online sites where you can ask an expert in real estate law and pay under $100 for an answer. I myself have used one of these services, and it was worth it.

I hired an online lawyer because the Covenants, Conditions, and Restrictions (CC&Rs) governing my condo building say that no business may be conducted out of any unit, and no businesses may be registered to any unit. However, I had heard that a new city ordinance made restrictions like this unlawful, though the legal language of this ordinance was extremely confusing. I finally went to a lawyer-by-the-hour website, and asked how these restrictions worked. The lawyer, in under 30 minutes, was able to clarify that most small, home businesses (with certain restrictions) were in fact lawful no matter what the CC&Rs said; this law explicitly overrides any CC&R restrictions on certain types of home businesses. I paid $60 for this answer.

Often, if your question is about a basic interpretation of legal language, it’s much quicker and cheaper for an online lawyer to address. Of course, the more complicated your situation, the less useful and inexpensive this type of lawyer will be.

Don’t Assume Anything About Your CC&Rs

It is essential to identify your unconscious assumptions when buying any property governed by a homeowners association (HOA), which many of us (like me!) learn the hard way. Are you planning on living in the unit, but assuming that if your work or living situation changes, or you need extra income, you can easily rent out your property? Most condominiums have a rental cap, which limits the total number of units that can be rented out at one time, and getting your unit on the rental market could be extremely difficult.

A lot of buyers also assume that they can rent out their property short-term on sites like AirBnB. In some condominiums, this can be easy, but in most, there are plenty of unseen difficulties. Perhaps you’ve lived in an apartment building previously, and seen other tenants easily (and likely illegally) rent out their units on a short-term rental site. This is probably easier to get away with in an apartment building, because the residents are all renters, and are much less invested in the property. In a condominium, the owner-residents may have much more restrictive language about short-term rentals, and are understandably much more invested in monitoring violations of these policies.

Especially before purchasing a condominium (or any HOA-governed property), it is essential to investigate your CC&Rs. This sounds exhausting, since these documents are extremely long, with difficult legal language. However, you don’t necessarily have to read every word, but be sure to look up the basics.

A lot of CC&Rs were created long ago, and are in old, typewritten format, which makes them difficult to search. However, most phones can now scan a photo of text and convert it into a searchable file. Before purchasing a condominium, highlight the CC&Rs, and copy/paste them into a computer document so you can search them for key words that address whatever issues you’re concerned with.

Remember; be clear with yourself about what you are expecting to be able to do with the condominium, and search your condominium documents for the answer. Hire a lawyer to verify any doubts you have. You’ll be much more confident and relaxed about your home purchase when you fully understand your own intentions, and how they relate to the laws and restrictions governing your new home!

Many California licensees are having trouble submitting their Fair Housing Continuing Education course certificates, even when they’ve fulfilled all requirements. If this has happened to you, this brief article should help you fix the problem!

Photo by Thom on Unsplash

Licensees usually run into this issue when they input all their CE certificates to their account, and receive the following error message:

“The Fair Housing continuing education course entered did not include a interactive participatory component and therefore cannot be counted towards your continuing education requirements.”

This error message generally occurs when a licensee enrolled in the CE course before October 2022, when new Fair Housing CE requirements went into effect. However, these licensees have in fact taken both the old Fair Housing course, as well as the new one. The problem is that the Department of Real Estate system cannot understand that both the old course and the new course are being submitted; the system simply sees the old Fair Housing course, and immediately generates an error message. When this happens, the student cannot input all their CE successfully.

The best way to bypass this error is to simply omit the old Fair Housing course when inputting CE certificates. The title of the course to omit is “Diversity, Systemic Racism, and Federal Fair Housing Law.”

If you simply do not submit this course, you should be able to successfully input all your CE into your account. This trick should bypass the DRE’s software glitch, and allow you to start the new year with a full deck of satisfied CE requirements!

Why do so many property deeds specifically mention “love and affection”? What is so passionate about the deed to a property? This use of “love and affection” is based on consideration. While “consideration” sounds emotional and empathetic, consideration is about payment and sacrifice, and not about empathy.

Centuries of contract law in the United States make clear that, for a contract to be valid, there must be consideration. Consideration is not exactly payment, though it can involve payment. Essentially, each party to a contract must sacrifice something to show consideration of the contract. These mutual sacrifices show intent to enter into a contract; they are called “consideration” because they show that each party has truly considered the contract with genuine intent. Mutual consideration also provides a way for a court to determine whether a contract has been performed; that is, if there’s a dispute, a court can determine if each party has fulfilled their respective promises to sacrifice something.

The typical version of consideration involves one party agreeing to pay money to another party if the other party agrees to give something in return. This sounds basic and straightforward. However, note that a contract is an agreement to do something in the future on the condition that the other party holds up their end of the contract. A contract says “I’ll perform this action on the condition that you do this thing.” It is important to understand in the above example that the contract is not the actual providing of payment or service itself, it is the agreement to do so. For example, if you simply gave the other party 100$ as a gift, you did not create a contract. The act of giving someone money itself is not a contract, but a promise to give someone money on the condition that they do something in return is considered a contract.

Thus, a contract involves mutual, conditional promises by each party. These mutual promises are how a court can tell if a contract has been fulfilled if there is any doubt. If two parties agree that A will give B $300,000 if B gives A their house, the court can easily tell when the contract has been fulfilled if there is a dispute. If A gives $300,000 to B, but B refuses to give A their house, a court can easily tell that the contract has not been fulfilled, and can enforce this contract through specific performance (which is basically forcing B to perform the contract and give A the house).

Each party’s offer of consideration is essentially to provide proof of the contract if there is a dispute, and to provide a way for a court to tell if the contract has been executed. Note that a form of consideration must be valid in order to make the contract enforceable. An example of invalid contract consideration is a promise of “love and affection.” For example, if A and B make a contract that A will buy B a house if B provides love and affection, a court could easily determine if A had provided B the house, but could not easily determine if B had provided love and affection to A. If no dispute arises, and each party is satisfied with their end of this love-based property exchange, then a court would not have to become involved. However, imagine if B takes A to court, and B says that they have held up their end of the contract by providing love and affection, but A won’t give B the house. For the court to be able to force A to give B the house, the court would have to be able to figure out if B had provided love to A. Since “love and affection” is highly subjective, this type of consideration cannot be enforced in a contract; a court cannot determine if love and affection has been provided, and a court could not force a party to provide love and affection. Thus, love and affection is not valid consideration for a contract. A contract made for love and affection may be enforceable between two parties on their own, but cannot be enforced in a court of law.

So if “love and affection” is not valid consideration for a contract, why do so many property deeds cite “love and affection” as consideration for the property exchange? This is an extremely confusing topic in the real estate industry. Some of this confusion is based on a misunderstanding of what a deed is, exactly. A deed is not a contract, a deed is an instrument of conveyance. Smartasset.com has an incisive explanation of this difference, saying that “A deed is not a contract… instead, a deed is the action. It is the document which transfers the property described within. In a real estate transaction, the parties outline their terms of sale in one document (the contract). Then the property owner conveys that property in a separate document (the deed).”

A deed is the execution of an action, it is not a promise to perform future action. A deed is the instrument that transfers the title (ownership) of the property. Thus, a deed must be in writing. A contract, on the other hand, does not necessarily have to be in writing (with some exceptions), though it may be very difficult to enforce if it is not written.

Since a deed is the action of ownership transfer, when a deed states “consideration,” it is stating the consideration that has already been paid. When a deed is transferring property ownership that is a gift, the deed often will state “love and affection” as consideration, to clarify that there was no money exchanged, or other form of payment. This sort of consideration is valid for a deed, because a deed is not a contract that may or may not be executed; a deed is the execution of ownership transfer itself. It does not matter why you decided to transfer your property to another if you have already done so; since a deed is the instrument of transfer, there is no mutual exchange of promises to enforce in the future. A deed is somewhat like a contract that has already been executed.

It is important to note that the fact that a property was a gift could become relevant in the future as a result of a contract. For example, if a property owner owes money to creditors, and the property owner deeds their property to a close friend for free, those creditors might still be able to seize the property as payment for debts. In this case, the property owner is clearly trying to give away assets to friends or family rather than have them seized by debt collectors. The deed consideration of “love and affection” would likely help to prove this illegal debt avoidance. Thus, a deed could be invalidated in certain situations.

In real estate, it is important to understand the differences between deeds and contracts. Understanding these differences helps explain why certain consideration that may be valid for a property deed might not be valid consideration for a contract. Consideration like “love and affection” can be a valid explanation for an action that is already performed, like a deed, but is not consideration that a court could force one party to pay to another in a contract dispute.

References:

GA Code § 44-5-30 (2020)

James D. Gordon, III, Consideration and the Commercial-Gift Dichotomy, 44 Vanderbilt Law Review 283 (1991)

Joseph P. McKeehan, Is Moral Consideration on the Way Out in Pennsylvania?, 55 DICK. L. REV. 115 (1951)

Eric Reed, “Warranty Deed vs. Quitclaim Deed,” www.smartasset.com, New York, NY, https://smartasset.com/mortgage/warranty-deed-vs-quit-claim-deed, accessed 1/12/23

J. H. Verkerke, Contract Doctrine, Theory and Practice, CALI eLangdell Press, 2012

Debra Cassens Weiss, Promise of Love and Affection Isn’t Sufficient Consideration for Contract, Ohio Supreme Court Says, American Bar Association Journal, 2012

Alan M. White (2020) “Stop Teaching Consideration,” Nevada Law Journal: Vol. 20: Iss. 2, Article 5.

Photo by Martin Widenka on Unsplash

The more you search for the difference between title theory and lien theory online, the less you’ll know. If you search for whether your state is a lien theory or title theory state, you’ll find an equal number of articles saying it’s lien theory as you’ll find saying it’s title theory. Of course, you can find anything you want online, but why is something that seems black-and-white so poorly understood? This topic is a fascinating example of how facts can become distorted and amplified the more articles are written about them, and as legal language shifts over time.

The original context of the terms “lien theory” and “title theory” focused on whether the borrower in a mortgage was more like a tenant or an owner. In this context, “title theory” treated the borrower as a tenant living in the lender’s property, while “lien theory” saw the lender as having a lien on the borrower’s property.

William H. Lloyd, in the 1923 edition of The Yale Law Journal, describes the lien theory of mortgages as a relatively “new theory.” This article, titled “Mortgages-The Genesis of the Lien Theory” references the old English common law mortgage, in which the borrower’s rights in the mortgaged property were “in some respects less than a tenant….”¹ Thus, the old legal doctrine was that the lender owned the property, and the borrower was more like a renter who only gained ownership rights after payment of the entire mortgage. The lien theory then developed in defiance of this doctrine, and was based on the new idea that the borrower had all rights of ownership in the property, so long as they made timely payments on their loan. Thus, lien theory developed as a way to give the borrower almost all ownership rights, instead of the lender.

In the present day, no state in the country operates under “title theory” in the way this term was originally construed; nowhere in the United States is the borrower treated mostly as a renter in their mortgaged property.

In the present day, when a borrower takes out a loan and the lender holds legal title, the rights of the lender are extremely limited; the lender only may sell the property in the very specific circumstance that the borrower defaults on the loan. In every other respect, the borrower is the owner–not the renter–of the property. In an early 20th century case in Virginia, the court phrased this perfectly, saying that the borrower has all benefits of ownership, and the lender has only “the bare legal title to the property conveyed” and has “no beneficial interest therein.” ²

As this ruling demonstrates, even when the borrower does not hold the legal title to the property, the lender (or trustee) has almost no rights whatsoever in the property; the lender/trustee only has the right to sell the property in the specific event that the borrower defaults on the loan. All states in the U.S. give rights of ownership to the borrower on a loan, except in the limited circumstance that the borrower defaults. The original definition of “lien theory,” as described earlier in the 1923 edition of The Yale Law Journal, was that the borrower had almost all rights of ownership, and the lender only had a lien on the property. Thus, all states in the present day would be considered “lien theory” by this early definition of this term.

So why are there all these lists online distinguishing between title theory states and lien theory states? This is because “title theory” now commonly describes only one specific aspect of a mortgage, which is how it is foreclosed. As Rocket Mortgage describes, “the main difference between title and lien theory is seen when foreclosure proceedings happen.”³ In the present day, the defining characteristic of lien theory vs. title theory relates solely to foreclosure. For example, “Massachusetts is a title theory state with nonjudicial foreclosure (rather than a lien theory state)” according to Dr. Singer of the Harvard Law School.⁴ 

In lien theory states, if a borrower defaults on their mortgage, the lender has to go to court to ask permission to initiate foreclosure. By contrast, in title theory states, the lender has the right to nonjudicial foreclosure; that is, the lender does not have to ask the court for permission to foreclose on the loan. In these title theory states, the lender has the title right of sale without going to court, but has no other ownership rights in the property. This title right of sale that the lender holds applies only if the borrower defaults on the loan; in no other circumstance can the lender take the property from the borrower and sell it.

Though the terms “title theory” and “lien theory” have changed significantly, and now really only describe foreclosure, this definition seems fairly straightforward… right? Wrong! We’re just getting started with the confusion and complexity relating to title/lien theory.

As we’ve just described, in states that are lien theory, the lender must go through the court system to foreclose on a mortgage. This is expensive and time-consuming for the lender. Thus, in these states, lenders generally do not use mortgages at all; they primarily use trust deeds instead of mortgages. With a deed of trust, the lender does not need a court’s permission to foreclose a loan, no matter where in the country the foreclosure takes place.

With a trust deed, an impartial third party–the trustee–holds legal title to the property. Thus, neither the borrower nor lender has legal title, since legal title is held by the trustee. The trustee has the conditional, limited power of sale in the specific event that the borrower defaults, and has this limited power on behalf of the lender. In no other way does the trustee or lender have any ownership rights in the property.

As described earlier, “lien theory” and “title theory” now only describe whether a mortgage must be foreclosed in court, and have nothing to do with trust deed foreclosure. Trust deeds are a title theory-style instrument, meaning that lenders avoid court when foreclosing. Trust deeds are a title theory-style instrument that can be used in lien theory states, since lien theory only relates to whether mortgages are foreclosed in court or not. Lenders hate court foreclosure. Thus, most lien theory states function like title theory states because most home loans are trust deeds, not mortgages, in those states, so that lenders can avoid court.

So how do you distinguish between a lien theory and title theory state? The key is to know how a mortgage is foreclosed in that state. For example, Oregon is a lien theory state because mortgage foreclosure must go through the courts. However, the vast majority of all loans secured by residential real property in Oregon are trust deeds, for the sole reason of avoiding court foreclosure. Remember that a trust deed features nonjudicial foreclosure no matter what state it’s in. Since most Oregon foreclosures are nonjudicial, it would seem tempting to say that Oregon is a title theory state. However, all mortgages in Oregon must be foreclosed in court, so Oregon is lien theory, which is why most lenders avoid mortgages in Oregon and use trust deeds instead. The key is that in no situation does the lender hold the title right of sale in Oregon. Even with a trust deed, the title right of sale title is held by the trustee, not the lender. Thus, Oregon acts like a title theory state in that the borrower usually does not hold title, but the lender never holds title, so it is not a title theory state.

In Georgia, on the other hand, the lender holds the title right of sale in the event that the borrower defaults on their mortgage. The lender holds the title in a manner similar to how the trustee holds title in a deed of trust; they hold this legal title only for the purpose of selling the property if the borrower defaults. The key difference here is that in Oregon, the lender never holds title; in Georgia, the lender may hold bare legal title in a mortgage. Thus, by the modern definition, Oregon is lien theory, and Georgia is title theory, which is entirely based on whether or not the lender may hold legal title in a mortgage. In neither state does the lender hold title in a deed of trust; with a trust deed, the title is held by a third party trustee.

In the 19th and early 20th centuries, the current mortgage law in all states would have been considered lien theory, because the lender has almost no rights of ownership over the borrower’s property. Though this topic has changed dramatically over the last few hundred years, the overall shift from the lender having ownership rights to the borrower having these rights has been clear and decisive.

1. William H. Lloyd, Mortgages-The Genesis of the Lien Theory, 32 Yale L. J., 233-246 (1923) https://www.jstor.org/stable/788407#metadata_info_tab_contents
2. Charles E. Van Fossen, The Prevailing Theory of Mortgages and Deeds of Trust in Virginia, 1 Wm. & Mary Rev. Va. L. 71 (1951), https://scholarship.law.wm.edu/wmrval/vol1/iss3/2
3. Bowling, Lauren, ‘Defeasance Clause: Definition And Overview,’ www.rocketmortgage.com, Rocket Mortgage LLC, https://www.rocketmortgage.com/learn/defeasance-clause, accessed 12/27/2022
4. Joseph William Singer, Mortgagor Cannot Challenge Foreclosure Because Of Lack Of Evidence Of Valid Mortgage Assignments,” www.scholar.harvard.edu, Boston, MA, Harvard University, 2015, https://scholar.harvard.edu/jsinger/blog/mortgagor-cannot-challenge-foreclosure-because-lack-evidence-valid-mortgage-assignments, accessed 12/27/2022

Other sources used in this article:
Sammid J. Mansoor, ‘Virginia Mortgage Law Basics,’ www.avvo.com, https://www.avvo.com/legal-guides/ugc/virginia-mortgage-law-basics-1, accessed 12/27/2022
Jayne Thompson, ‘Lien Theory of Mortgages,’ www.sfgate.com, San Francisco, CA, Hearst Newspapers, https://homeguides.sfgate.com/lien-theory-mortgages-94265.html, accessed 12/27/2022

When selling your home, there are certain improvements that will waste money and make little difference in your home’s sale price. How do you know which improvements will be profitable, and which are not worth your money or time?

A recent study by Opendoor suggests that the quantity of bathrooms in a house affects its sale price more than the quality of those bathrooms. According to Opendoor, a full bathroom remodel increased resale value by 3.7%, while adding another bathroom increased the sale price by 5.7%. Of course, this does not mean that adding three bathrooms will increase the price by 5.7% per bathroom. However, making your one bathroom really, really nice is less valuable than leaving it as-is, and adding a second bathroom.

Photo by Ilse Orsel on Unsplash

“All or nothing” is a good phrase to keep in mind for home improvements and how they affect sale price. Full renovations are generally more profitable than partial renovations, or smaller upgrades. According to the New York Times, across all 50 states, full bathroom renovations increased sale prices by more than their cost. However, smaller renovations (like laying new tile) generally did not pay for themselves, and in fact lost money.

Perfection is the Enemy of the Good

When selling your home, it can be tempting to make it absolutely perfect before you list it. Selling a home is stressful, and putting work and money into it may give you a feeling of control over the uncertainty of the sale process. Making your home look perfect before selling can also come from a place of guilt or shame over all the improvements you never got around to making, or all the little problems you never fixed. However, most buyers are looking at the big picture, and are expecting to make at least a few, basic improvements.

You want your home to be a good, clean canvas for your buyer’s imagination. Thus, you should go for basic cleanliness with no major distractions, rather than trying to upgrade and fix absolutely everything.

Homelight’s Seller Resource Center also advises against partial renovations and small upgrades. For example, if you have a kitchen that’s essentially unchanged since 1990, adding a few new appliances and a backsplash will only draw attention to the aging linoleum floor and outdated cupboards, since they are noticeably mismatched. Either fully renovate the kitchen, or do nothing at all.

That said, there is some subtlety and art to this “all or nothing” home improvement tactic. It might be better to phrase this tactic as “do all, or make it look like you did nothing.” For example, if you have appliances that are extremely old, it might be a good idea to replace them. However, don’t replace them with new appliances; Homelight recommends replacing them with used appliances that are in better condition. A $3,000 refrigerator is likely to stand out as strange in an old, un-renovated kitchen, but a used, $400 refrigerator in good condition will simply make the kitchen look a bit cleaner and better cared-for. A clean kitchen or bathroom with reasonable appliances will reassure the buyer that the house has been well-maintained, while an $8,000 robotic toilet will convince no one you live in a mansion, and will only lose you money.

Whether something is an expensive improvement or modest, if it stands out, it’s likely a bad idea. Look at your home as a whole, and asks yourself what distracts from the larger picture. All changes should be in service of making your home into a basic, clean, plausible blank slate for your buyer.

Before you embark on a big renovation, look up the average increase in price for that renovation in your market. One helpful resource is Opendoor’s home improvement calculator, where you can check your local market for which home improvements generate the largest increases in sale price (link below).

Resources mentioned in this article:

Opendoor: Top Improvements That Increase Home Value

The New York Times: Is That Bathroom Remodel Worth It?

It sounds crazy; renting the home you live in while owning an investment property. However, this might be crazy-smart in the right situation.

With interest rates skyrocketing, taking out a loan to buy in your current neighborhood might be unaffordable. However, a property you can afford might be prohibitively far away, or too small for your needs. This is why, in some situations, it makes sense to rent where you live and buy an investment property you can afford, which you can use for income, equity building, and tax breaks.

Photo by chris robert on Unsplash

The standard financial wisdom is that your rent money would be better spent on a mortgage payment rather than going to your landlord. There is much to be said for this philosophy; however, it is a bit too simple to apply to all situations. For example, if you pay the average rent in Manhattan of $3,975, this does not mean you can or should pay an average $1.4 million for a home in Manhattan at 7% interest. The common-sense financially savvy option would be to buy a home in Poughkeepsie, NY for an average $359,000 and commute two hours (each way) to your job in Manhattan. However, this makes only financial sense; most people would suffer in their life and work from a 4-hour daily commute. That said, there are some people who would be happy with this, and for those people, living two hours from work and saving money is a great idea.

Of course, the example I just provided is an extreme one; if home prices decrease in your city by about $100,000 if you commute 15 minutes, there’s something to be said for buying in the suburbs rather than renting downtown. But if this doesn’t work for your lifestyle, and the quality of your life and work would decrease if you lived where you can afford to buy, renting makes a lot of sense.

So, imagine you’ve decided you like renting an apartment downtown. There’s much to like about this, since you would avoid sky-high interest rates and the massive special assessments often charged to condominium owners. You like renting downtown, but you’ve saved up some money, and you’d like a good investment for it. This is when it might make sense to buy a small investment property you can afford and rent it out.

If you have a $30,000 down payment, you might consider purchasing a $250,000 investment property and finding a renter, or listing it on a short-term rental site. Even if you just break even on the amount you charge for rent versus your mortgage payment, the tax breaks can increase your annual after-tax income. For example, you can deduct 3.636% of your building’s value from your taxes each year to compensate for depreciation expenses. You can also deduct up to 20% of your income on the property by using a pass-through deduction (if you carefully follow IRS rules). Additionally, you can deduct money you spend to improve your property. Owning an investment property opens up more tax break possibilities than owning the home you live in.

If you own the home you live in, your home will never be a source of income, while a rental property can be. Of course, as a renter-landlord, you will be paying rent as well as collecting it, so you may be spending your income quickly. However, if you simply continue renting without owning an investment property, you will not be building equity, you won’t collect rental income, and you won’t have access to certain tax breaks.

Whether you decide to rent, own, or both, the best course of action is to truly get to know yourself and your needs, and ask yourself tough questions. Don’t make a large purchase just because society tells you it’s a good idea; you could easily wind up in a mountain of debt. Renting property exposes you to far less risk than owning it. When your ceiling starts leaking or your appliances break, your landlord is usually the one who pays. Whether it’s an investment property or a home you live in, the most important consideration is whether you can actually afford it.

Just like all of us, every housing market crash is special and unique in its own way. Due to inflation and much higher interest rates, it’s easy to think that the housing market is going to crater and that prices will fall like they did in 2008. This may happen, but it is important to recognize that this is a completely different type of market than the housing bubble from 14 years ago. Though prices have dropped, it is not clear that they are going to crash as steeply as they did during the Great Recession. So, as a real estate professional, what should you tell your clients?

Photo by JOSHUA COLEMAN on Unsplash

According to Redfin, nearly 60,000 home purchase agreements were called off in September, the most ever called off in a month (aside from the month the pandemic started). Clearly, people are rattled by rising interest rates, and other uncertainties in the economy. Sold prices, however, have not dropped to the same extent they did when the housing bubble burst in 2008. A major reason for this may be that the supply of homes for sale is extremely limited, which keeps prices higher than if the market were flooded with sellers. A “critical difference” between now and the 2008 recession is that “there just isn’t enough housing supply today,” write Philipp Carlsson-Szlezak and Paul Swartz, global chief economist and senior economist (respectively) at Boston Consulting Group.

There are many reasons for this limited supply. One factor may be potential sellers deciding to wait until the market improves to sell their homes. Another underlying problem is that the housing market has been under-supplied for years, well before the pandemic. During the 2008 crash, there was a massive supply of homes that had been built, and many more cheap homes in foreclosure. This large supply of inexpensive homes helped tank prices. After the housing bubble burst, thousands of home building tradespeople left the industry for other employment. The New York Times estimates that housing starts went from 2.1 million in 2005 to 554,000 in 2009, a massive decrease. Since homebuilding is extremely labor intensive, time-consuming, and takes significant training, 14 years has not been long enough to attract thousands of highly trained home builders back into the industry. The pandemic helped erase any progress that had been made in construction, further limiting the supply of available homes.

Though 60,000 people called off purchase agreements last month nationally, housing supply is becoming increasingly more limited. In Oregon, there are almost 20% fewer homes on the market than there were just before the pandemic. This limited supply has a complex effect on home prices, and may be keeping prices higher than they otherwise would be.

It is impossible to predict where home prices will go in the longer term. However, in the real estate industry, talk of recession and a major market correction have convinced many potential buyers and sellers that home prices are about to drop dramatically. It is important to explain to clients that, though we are likely entering a recession, home prices may not crash to the extent that many people feel they will. Thus, it may not be a winning strategy to wait out the market in the near-term.

Though not much is clear about where the market is headed, it is clear that the under-supply of homes (and nervous buyers and sellers) have slowed the real estate business down significantly. When there are fewer buyers and sellers, the real estate industry suffers.

There is no way of knowing with certainty where the market is headed, but if you can explain to your clients the factors that are putting both upward and downward pressure on home prices, you can help manage their expectations, and give them a more realistic impression of what they will encounter in this complex housing market.

Don’t learn by making real-world mistakes! Instead, gain an immediate competitive edge in your mortgage career with Mortgage Boot Camp 101 by OnlineEd. 

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This easy-to-use guide clarifies which CE courses you need to take. Simply skip to the paragraph heading below that best describes your license type and renewal status!

License Type: Salesperson

Status: Renewing for the first time, if your renewal date is on or after January 1, 2023

1) A two-hour implicit bias training course

2) A three-hour fair housing course that includes an interactive, participatory component during which the licensee will role-play as both a consumer and as a real estate professional

3) Four separate three-hour courses in ethics, agency, trust fund handling, and risk management

4) At least 18 hours of consumer protection courses 

5) The remaining education to complete the total 45-hour requirement must be on the topics of consumer service or consumer protection

Get all of this CE in one place by clicking here!

License Type: Broker 

Status: Renewing for the first time, if your renewal date is on or after January 1, 2023

NEW REQUIREMENTS: You must complete 45 clock hours of DRE-approved CE that includes:

1) A two-hour course in implicit bias training 

2) A three-hour fair housing course that includes an interactive, participatory component during which the licensee will role-play as both a consumer and as a real estate professional

3) Five separate three-hour courses in ethics, agency, trust fund handling, risk management, management and supervision

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Even if a property is not part of a Planned Unit Development (PUD), it may have to be defined as such for loan approval. This is because Fannie Mae, the government-sponsored enterprise that purchases mortgage loans, defines PUDs completely differently than local governments do. Why is this?

To understand this conflict, it helps to define what a PUD is. To start with, a Planned Unit Development is planned as a PUD. This may seem like a ridiculous clarification, but is an essential characteristic that sets a PUD apart from neighborhoods that are similar to PUDs, but are not PUDs. A PUD was planned as a PUD, and approved as a PUD by the local government; thus, a PUD has been a PUD since its inception. In this way, a PUD is like a subdivision; both involve an area of many homes developed as part of a plan approved by the local municipality.

Photo by Avi Waxman on Unsplash

Now, what makes a PUD different from a basic subdivision is that all owners who buy into the PUD must be part of a Homeowners Association (HOA). All owners must pay dues to this HOA, and cannot opt out. In a PUD, the individual property owners own their property, and also own communal property through their HOA. A PUD typically has significant communal property ownership, like communally owned roads, parks, spa facilities, gyms, and other amenities. These communal properties are maintained through HOA fees paid by individual owners. That is, the communal property is owned by the HOA, so all property owners have a share in the communal property, since they all have a share in the HOA.

How is this different from condominium ownership, which also has an HOA that owns communal property? The difference is that condo owners do not individually own the land on which their condominium sits. Condo owners typically only own the airspace within their units, and limited, superficial use of their walls and floors. However, in a PUD, each member of the HOA owns their entire house, and the property on which it sits. Thus, members of a PUD own land, not just airspace.

Though members of a PUD own land, PUDs generally have strict rules about the use of this land. Rules might involve restrictive quiet hours, restricted house paint colors, restricted types of plants that may be grown, specific fencing that must be used, and other significant limitations on land use.

A common source of confusion in the real estate industry lies in defining how PUDs are different from neighborhoods that have HOAs, but are not PUDs. Many neighborhoods have Homeowners Associations that require each owner to pay an annual fee, usually for certain limited maintenance of a communal part of the neighborhood. For example, some neighborhoods have a communal well that supplies water to all owners, and each owner must pay dues to the HOA to maintain this well. Other neighborhoods may have a fence and plantings at the entrance to the neighborhood, and charge owners an HOA fee to maintain this entrance.

So, what is the difference between a neighborhood that has an HOA but is not a PUD, and a neighborhood that is a PUD? The source of most of these differences comes back to planning. A PUD is planned as a PUD, and is approved as such by the local government. At the time of approval, the developer of the PUD has created communally owned amenities, restrictions on the use of each property, and many other rules. A neighborhood that simply has an HOA but is not a PUD was not planned or approved as a PUD by the local government. In fact, the neighborhood may have many properties within it that were built decades apart, not as part of the same planned development. However, due to the nature of the neighborhood, it may have been necessary to require all owners to use the same well or to require communal maintenance of some other basic necessity, like a retaining wall to keep out a nearby stream or river. The HOA fees could also be used to clean the neighborhood sidewalks, or perform other aesthetic maintenance. 

These may not seem like particularly important distinctions between PUDs and non-PUD HOAs. However, Fannie Mae, which purchases over 4 million home loans a year, usually defines neighborhoods with HOAs as PUDs, even if they are not. This is because Fannie Mae defines a PUD as a neighborhood in which there is common property and participation in the HOA is mandatory. Thus, almost any neighborhood with common HOA property is a PUD, according to Fannie Mae. This means that thousands of neighborhoods that were not planned, approved or categorized as PUDs must be defined as a PUD in order to be sold to Fannie Mae on the secondary market.

This confusing definition of PUDs can create problems for the loan approval process, as there is often a discrepancy between the way the property is categorized in county records, and the way Fannie Mae categorizes it. Additionally, lenders often treat PUD properties differently, since PUDs usually have higher HOA fees that the borrower must pay on top of their mortgage payment.

An owner in a neighborhood with an HOA that is not a PUD usually pays minimal fees, often only a few hundred dollars a year. A PUD usually has significant, high-maintenance common property (gyms, tennis courts, roads, etc.), so the fees charged to maintain these amenities are much higher.

Another common problem occurs when lenders assume a PUD property is a condominium because it has an HOA. Since lenders are much more strict about lending requirements in condominium projects, mistakenly categorizing a PUD property as a condominium can create significant, time-consuming problems for loan approval.

If a lender has mistakenly categorized a property as a condominium, this mistake must be corrected as early in the approval process as possible. However, if the lender categorizes a non-PUD property as a PUD to fit Fannie Mae’s unique requirements, this might not actually be a mistake, and might help with loan approval.

As is true in real estate and law, seemingly basic definitions are context-dependent. The single most helpful way to define a PUD might be to say “Who’s asking?”