How To Buy A Foreclosed Home

photo by Taber Andrew Bain

US News & World Report quoted me in  How to Buy a Foreclosed Home. It opens,

As home prices soar in many cities, buyers might look to foreclosures as an affordable option for landing their dream home. Typically, a foreclosure occurs when a homeowner no longer can make the mortgage payments and the lender seizes the property. The lender then requires the former owner to vacate the property before offering it for sale, usually at a discounted price. In some cases, the home is auctioned off to the highest bidder.

Foreclosures offer home shoppers the potential to score a great deal, says Elizabeth Mendenhall, a Realtor in Columbia, Missouri, who is president of the National Association of Realtors.

“Sometimes people think a foreclosure only happens to the lower end of the market, but you can definitely find foreclosures at any price range,” she says.

But while buying a foreclosure can save you a lot of cash, it does come with risks. If you pursue a foreclosure, it helps to have a “stomach of steel,” says David Reiss, law professor and academic programs director of the Center for Urban Business Entrepreneurship at Brooklyn Law School.
“There’s going to be a lot more ups and downs” than in a typical homebuying process, says Reiss, whose work focuses on real estate finance and community development.

Why Buy a Foreclosure?

In recent years, foreclosure sales have been trending downward, according to national property data curating company Attom Data Solutions. That is largely because a strengthening U.S. economy has reduced the number of borrowers who lose their homes as a result of failing to pay the mortgage. In 2017, distressed home sales – including foreclosures and short sales – made up 14 percent of all U.S. single family home and condo sales, according to Attom Data Solutions. That number was down from 15.5 percent in 2016 and a recent high of 38.6 percent in 2011.

Still, some buyers look to foreclosures to get the best possible deal. Homes may be for sale in various states of foreclosure. For example, pre-foreclosure is a period when the owner has fallen behind on payments, but the lender has not actually taken the home from the owner. Homes sold at this point often go through the short sale process, where the lender agrees to accept an amount of money from the buyer that is less than what the current owner owes on the mortgage.

Properties that are already in foreclosure are sold at an online or offline auction, or by a real estate agent. The biggest lure of buying a foreclosure is the potential savings you get compared with buying a similar nondistressed property.

“It can be like a 15 percent discount on your neighboring houses,” Reiss says. “So, it can be significant.”

But Mendenhall says how much you will save depends on the local real estate market and the stage of foreclosure of the property.

The Risks of Buying a Foreclosure

Purchasing a foreclosure involves several substantial risks, so buyers must enter the process with their eyes wide open. In many cases, if you buy a foreclosure at auction, you must purchase the property sight unseen. Reiss says this is the biggest potential danger of buying a foreclosure.

“The big, scary thing is that with a number of foreclosures, you can’t actually inspect the property before you actually bid,” he says. “That’s in part why the prices are below the market.”

Even if you can get a professional inspection on a foreclosure, you typically have to buy the house “as is.” Once you purchase the home, any problems that pop up are yours – as is the responsibility for finding and paying for a remedy. Such problems are more likely in a foreclosure than in a nondistressed property. For example, in some cases, a frustrated family might strip the home of valuable elements before vacating the house.

“Or they kind of just beat it up because they were angry about having to go through the foreclosure,” Reiss says.

The mere fact that the home is vacant also can lead to problems. Reiss says a home is like a plant – if you don’t tend to it regularly, it can wither and die. “If you happen to leave it alone on its own for too long, water leaks in, pipes can burst, rodents can get in, just the elements can do damage,” he says.

Mendenhall adds that people who lose their homes to foreclosure typically have major financial troubles. That can trigger other troubles for the new owner. “If the previous owner was in financial distress, there’s a chance that there’s more maintenance and work maybe that they haven’t completed,” she says.

Reducing the Dangers of Buying a Foreclosure

There are a few things you can do to mitigate the risks associated with buying a foreclosure. For starters, see if you can get a professional inspection of the property. Although buyers often cannot inspect a foreclosure property, that is not always the case. So, be sure to ask a real estate agent or the seller about hiring a home inspector.

“Even though it may extend the process, if you can have a qualified inspector come in, you can know a little bit more about what you’re getting into,” Mendenhall says.

If you can’t inspect the property, Reiss recommends researching its history. Look at publicly available records to find out when the property was last sold and how long the current owner had possession. Also, check whether building permits were drawn and what type of work was done. “Maybe you’ll see some good news, like a boiler was replaced two years ago,” Reiss says. “Or maybe you’ll see some scary news, like there’s all these permits and you don’t know if the work was completed.”

Also, visit the house and perform a “curbside inspection” of your own, Reiss says. “Even if you can’t go inside the house, you want to look at the property,” he says. “If you can peek in the windows, you probably want to peek in the windows.”

Knock on the doors of nearby neighbors. Tell them you want to bid on the property but need to learn all that you can about the previous owners, including how long they lived in the home and whether they took care of it. And ask if there have been any signs of squatters or recent break-ins.

“Try to get all that information,” Reiss says. “Neighbors are probably going to have a good sense of a lot of that, and I think that kind of informal due diligence can be helpful.”

Working with a real estate agent experienced in selling distressed property may help you avoid some of the potential pitfalls of buying foreclosures, Mendenhall says. Some agents have earned the National Association of Realtors’ Short Sales and Foreclosure Resource Certification, or SFR. Such Realtors can help guide you through processes unique to purchasing distressed properties, Mendenhall says.

How to Find a Foreclosure

You can find foreclosures by searching the listings at bank websites, including those of giants such as Wells Fargo and Bank of America. The government-sponsored companies Fannie Mae and Freddie Mac also have listings on their websites.

The federal government’s Department of Housing and Urban Development owns and sells foreclosed homes. You can find listings on the website.

Private companies such as RealtyTrac offer foreclosure listings online, typically for a fee. Finally, you can contact a real estate agent who will find foreclosures for you. These agents may help you find foreclosures before others snatch them up.

Is a Foreclosure Right for You?

Before you pursue a foreclosure, Reiss encourages you to ask yourself whether you are in a good position to take on the risk – and, hopefully, to reap the reward – of buying a foreclosure. It is possible to use conventional financing, or even a loan from the Federal Housing Administration or Department of Veterans Affairs, to buy a foreclosure. However, people with deeper pockets are often better candidates for buying a foreclosure.

Because the process can be highly competitive, buyers with access to large amounts of cash can swoop in and land the best deals. “You can get financing, but you need to get it quickly,” Reiss says. “I think a lot of people who go into purchasing foreclosure(s) want to have the cash to just kind of act.”

Sellers of distressed properties love cash-only buyers, because the home can be sold without a lender requiring either a home appraisal or a home inspection. “So, the more cash you have on hand, the more likely you’re playing in those sandboxes,” Reiss says.

In addition, buyers of foreclosures often need to spend money to bring a property up to code or to make it competitive with other homes in the neighborhood. “Have a big cushion in case the building is in much worse condition than you expected,” Reiss says.

He cites the example of someone who buys a foreclosure, only to discover that the piping has been stripped out of the basement and will cost $10,000 to repair and replace. “You need to know that you can handle that one way or the other,” Reiss says.

People with solid home maintenance and repair skills also are good candidates for buying a foreclosure. “I think if you’re a handy person, you might be able to address a lot of the issues yourself,” Reiss says. He describes such buyers as anyone who has “a can-do attitude and is looking to trade sweat equity for home equity.”

Reiss and Mendenhall agree that flexibility is crucial to successfully shopping for and purchasing a foreclosure. Mendenhall notes that a foreclosure sale can take a long time to complete. “It can be a long process, or a frustrating one,” she says. “It can depend upon where they are in the foreclosure process. It can take a much longer time to go from contract to close.”

For that reason, a foreclosure might not make sense for buyers who need to move into a property quickly, she says. Also, think hard about how you really feel about buying a house that needs extensive renovation work that might take a long time to complete.

“It can be hard for some people to live in a property and do repairs at the same time,” Mendenhall says.

Tapping Home Equity for Retirement Income

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Newsday quoted me in Consider Tapping Your Home Equity for Retirement Income (behind paywall). It opens,

Just as Dorothy in the “Wizard of Oz” had her ruby slippers that could have gotten her back to Kansas at any time with three clicks of her heels, retirees have the option of tapping their home sweet home to bridge income shortfalls.

Yet, according to research from the National Council on Aging, only 20 percent of retirees polled said they would be willing to use their home equity to generate income. Information was obtained through focus groups with 112 people aged 60 to 75, and two surveys of 254 financial advisers and 1,002 older homeowners.

When you’re in a pinch, here’s how to get the max out of your home.

– Get over the notion a home is sacred: “Using your home equity to generate retirement income can help you delay claiming Social Security,” says Gary Borowiec, a financial adviser and managing partner at Atlas Advisory Group in Cranford, New Jersey.

– Audit your housing situation: Determine if you’re using your home equity wisely. “Is a senior citizen living in the same home where she raised her children who have now gone off to live on their own? Would it make sense to downsize to an apartment with lower costs and fewer maintenance issues? If so, redirect some of the equity from the original home to investments that can generate an income stream over the course of her retirement,” says David Reiss, a professor at Brooklyn Law School specializing in real estate.

Millennials and Luxury Housing

 

photo by Jeremy Levine

The Phoenix Business Journal quoted me in Avilla Homes Finds Millennial Niche in Luxury Rental Market (behind a paywall). It opens, 

As home ownership rates declined in the past decade, more and more people have opted to rent homes. This provided a niche market for young professionals: luxury rental home communities.
Arizona-based NexMetro Communities has developed Avilla Homes, which COO Josh Hartmann calls a “hybrid between single-family living and apartment living,” with communities in the Phoenix and Tucson areas, as well as recent expansion into Denver and Dallas suburbs.
Hartmann said the draw of Avilla Homes is it is a unique hybrid: providing the feel of living in your own house without the responsibilities of being a homeowner. It incorporates some aspects of apartment living, such as on-call maintenance, but focuses on the draw of living in a single-family home, such as four-walled individual units with one’s own yard space.
“I think (owning a home) is less of a draw for investment’s sakes and if you take that away, owning a home is a lot of work,” Hartmann said. “You have to be constantly fixing things. What the real draw of our product is that you don’t have to worry about all those things but you still get to live in a home.”
When the project first began in Tucson in 2011, the board of directors thought its main consumer would be people who lost their homes in the recession and were looking to rent. But the project ended up being a success with an unexpected demographic-the millennials.
Hartmann attributes millennials’ attitude toward homeownership and how they spend their money as a factor in the communities’ success. He estimates that about 65 percent of Avilla Homes’ customers are early in their career, between the ages of 25 and 34.
“I just think what they want to spend the dollars they make on is different than what my generation or the generation before me did,” Hartmann said.
David Reiss, a professor of law at Brooklyn Law School says lifestyle changes coupled with the recession caused many people to turn to renting. The nation’s home ownership was down to 63.7 percent in the first quarter of 2015 from about 69 percent in 2004, according to census data.
“Another piece of it is kind of long term trends: Household formation, student loans that millennials have, another thing is income and job security,” said Reiss. ” A lot of things people have in place before they want to be a homeowner are not in many households.”

New Landlord in Town

Lionel Barrymore as Mr. Potter in "It's A Wonderful Life"

Lionel Barrymore as Mr. Potter in “It’s A Wonderful Life”

Bloomberg quoted me in Wall Street, America’s New Landlord, Kicks Tenants to the Curb. It opens,

On a chilly December afternoon in Atlanta, a judge told Reiton Allen that he had seven days to leave his house or the marshals would kick his belongings to the curb. In the packed courtroom, the truck driver, his beard flecked with gray, stood up, cast his eyes downward and clutched his black baseball cap.

The 44-year-old father of two had rented a single-family house from a company called HavenBrook Homes, which is controlled by one of the world’s biggest money managers, Pacific Investment Management Co. Here in Fulton County, Georgia, such large institutional investors are up to twice as likely to file eviction notices as smaller owners, according to a new Atlanta Federal Reserve study.

“I’ve never been displaced like this,” said Allen, who said he fell behind because of unexpected childcare expenses as his rent rose above $900 a month. “I need to go home and regroup.”

Hedge funds, large investment firms and private equity companies helped the U.S. housing market recover after the crash in 2008 by turning empty foreclosures from Atlanta to Las Vegas into occupied rentals.

Now among America’s biggest landlords, some of these companies are leaving tenants like Allen in the cold. In a business long dominated by mom-and-pop landlords, large-scale investors are shifting collections conversations from front stoops to call centers and courtrooms as they try to maximize profits.

“My hope was that these private equity firms would provide a new kind of rental housing for people who couldn’t — or didn’t want to — buy during the housing recovery,” said Elora Raymond, the report’s lead author. “Instead, it seems like they’re contributing to housing instability in Atlanta, and possibly other places.”

American Homes 4 Rent, one of the nation’s largest operators, and HavenBrook filed eviction notices at a quarter of its houses, compared with an average 15 percent for all single-family home landlords, according to Ben Miller, a Georgia State University professor and co-author of the report. HavenBrook — owned by Allianz SE’s Newport Beach, California-based Pimco — and American Homes 4 Rent, based in Agoura Hills, California, declined to comment.

Colony Starwood Homes initiated proceedings on a third of its properties, the most of any large real estate firm. Tom Barrack, chairman of U.S. President-elect Donald Trump’s inauguration committee, and the company he founded, Colony Capital, are the largest shareholders of Colony Starwood, which declined to comment.

Diane Tomb, executive director of the National Rental Home Council, which represents institutional landlords, said her members offer flexible payment plans to residents who fall behind. The cost of eviction makes it “the last option,” Tomb said. The Fed examined notices, rather than completed evictions, which are rarer, she said.

“We’re in the business to house families — and no one wants to see people displaced,” Tomb said.

According to a report last year from the Harvard Joint Center for Housing Studies, a record 21.3 million renters spent more than a third of their income on housing costs in 2014, while 11.4 million spent more than half. With credit tightening, the homeownership rate has fallen close to a 51-year low.

In January 2012, then-Federal Reserve Chairman Ben Bernanke encouraged investors to use their cash to stabilize the housing market and rehabilitate the vacant single-family houses that damage neighborhoods and property values.

Now, the Atlanta Fed’s own research suggests that the eviction practices of big landlords may also be destabilizing. An eviction notice can ruin a family’s credit and make it more difficult to rent elsewhere or qualify for public assistance.

Collection Strategy?

In Atlanta, evictions are much easier on landlords. They are cheap: about $85 in court fees and another $20 to have the tenant ejected, according to Michael Lucas, a co-author of the report and deputy director of the Atlanta Volunteer Lawyers Foundation. With few of the tenant protections of places like New York, a family can find itself homeless in less than a month.

In interviews and court filings, renters and housing advocates said that some investment firms are impersonal and unresponsive, slow to make necessary repairs and quick to evict tenants who withhold rent because of complaints about maintenance. The researchers said some landlords use an eviction notice as a “routine rent-collection strategy.”

Aaron Kuney, HavenBrook’s former executive director of acquisitions, said the companies would rather keep their existing tenants as long as possible to avoid turnover costs.

But “they want to get them out quickly if they can’t pay,” said Kuney, now chief executive officer of Piedmont Asset Management, a private equity landlord in Atlanta. “Finding people these days to rent your homes is not a problem.”

Poor Neighborhoods

The Atlanta Fed research, based on 2015 court records, marks an early look at Wall Street’s role in evictions since investment firms snapped up hundreds of thousands of homes in hard-hit markets across the U.S.

Researchers found that evictions for all kinds of landlords are concentrated in poor, mostly black neighborhoods southwest of the city. But the study found that the big investors evicted at higher rates even after accounting for the demographics of the community where homes were situated.

Tomb, of the National Rental Home Council, said institutional investors at times buy large blocks of homes from other landlords and inherit tenants who can’t afford to pay rent. They also buy foreclosed homes whose occupants may refuse to sign leases or leave.

Those cases make the eviction rates appear higher than for smaller landlords, according to Tomb, whose group represents Colony Starwood, American Homes 4 Rent and Invitation Homes. The largest firms send notices at rates similar to apartment buildings, which house the majority of Atlanta renters.

Staying Home

Not all investment firms file evictions at higher rates. Invitation Homes, a unit of private equity giant Blackstone Group LP that is planning an initial public offering this year, sent notices on 14 percent of homes, about the same as smaller landlords, records show. In Fulton County, Invitation Homes works with residents to resolve 85 percent of cases, and less than 4 percent result in forced departures, according to spokeswoman Claire Parker.

The Fed research doesn’t say why many institutional investors evict at higher rates. It could be because their size enables them to negotiate less expensive legal rates and replace renters more quickly than mom-and-pop operators.

“Lots of small landlords, when they have good tenants who don’t cause trouble, they’ll work with someone who has lost a job or can’t pay for the short term,” said David Reiss, a Brooklyn Law School professor who specializes in residential real estate.

Preparing for Surprise Closing Costs

photo by Chris Potter

The Wall Street Journal quoted me in Buying a Home? Prepare for Surprise Closing Costs. It opens,

Note to house hunters on a budget: A home’s sale price isn’t really the sale price—there are lots of closing costs and expenses that jack up the final number.

According to online real-estate listings site Zillow, buyers typically pay between 2% and 5% of the purchase price in closing costs. So if a home costs $300,000, that buyer can expect to pay between $6,000 and $15,000. Since the financial crisis, there’s more transparency on the part of lenders when disclosing the costs associated with a mortgage, so buyers know in advance how much they’ll need for the closing. But experts say that might not be enough.

Lender fees are only one part of the total cost of homeownership. Buyers must also pay appraisers, home inspectors and settlement agents, as well as the cost of title insurance, homeowners insurance and property taxes. And the fees don’t stop at the closing. Utilities, regular home maintenance and unexpected repairs add up as well—and can derail even the most experienced buyer.

*     *    *

Here are a few considerations to help you avoid surprises at the closing table.

Stash your cash. There is no real rule of thumb as to how much money buyers should put aside in addition to the balance of the purchase price and closing costs. But the more, the better. “You definitely want an emergency fund,” says David Reiss, a Brooklyn Law School professor who specializes in real estate. “Appliances have a habit of breaking right after you buy a house.”

Close on the last day of the month, or just before. One of the fees due at closing is prepaid interest, the daily interest charge accruing between the closing and the day on which your first mortgage payment is due. Closing on the last day of the month reduces this upfront cost.

Get an estoppel letter from the association. Your real-estate agent or attorney may obtain this letter, which lists the maintenance fee, when it’s due, any required escrows or membership fees and whether a special assessment has been levied. Review this letter carefully, and compare it with the purchase contract to make sure all fees are apportioned accurately between buyer and seller.

Leverage in a Tight Market

photo by Rex Pe

TheStreet.com quoted me in Home Shoppers Seeking Leverage in a Tight Market. It opens,

Homebuyers have faced tight supply issues this year, and obtaining leverage in this market has been challenging.

The lower inventories pushed sales in July down by 3%, according to the National Association of Realtors, a Chicago-based trade organization. The decline has resulted in sales falling back to levels in March and April with an annualized pace of 5.39 million, bringing the sales pace down by 2% from July 2015. The level of inventory of homes for sale has declined by 6%.
As the faster summer buying pace has moved into the fall phase when there are fewer buyers, consumers have a greater advantage as homes are on the market longer. For both May and June, the listings stayed on Realtor.com a median of 65 days. By July, that figure rose to 68 days and August brings even more options and should end at 72 days. The reduction of inventory has occurred for 47 consecutive months, helping sellers, but restricting options for buyers.

For homebuyers who want to nab their dream house in the neighborhood they have been eyeing, they still have leverage, but here are some tips to improve the process.

Home Buying Tips

Before consumers start shopping, they should work on improving their finances and avoid making any large purchases such as a car. After finding out your FICO score, the goal is to find ways for it to rise above 700, which means you will qualify with more lenders and obtain a lower interest rate, saving you thousands of dollars, said Jonathan Smoke, chief economist for realtor.com, a Santa Clara, Calif.-based real estate company.

Determine how much you can carve out of your savings for a down payment, but still maintain six months of emergency funds, especially if you are buying an older home which may have unexpected repairs.

The average down payment in 2016 is 11% across the U.S., but it depends vastly on the market and loan you are seeking.

“If you are struggling to come up with a down payment necessary for your market or type of mortgage, research down payment assistance programs,” he said. “Get all of your financial records organized, including recent bank and financial statements, the last two years of income tax filings and pay statements.”

There are many opportunities available since mortgage rates remain near historic lows and are unlikely to see substantial moves soon.

“The buying opportunity is still substantial and now the annual cycle means you will face less competition on homes that are on the market,” Smoke said.

Sellers want to see serious buyers, so getting pre-approved from a lender is important.

“A pre-approval letter as part of an offer will communicate to the seller that you have the ability to close,” he said.

Sellers still have an advantage and even though there are fewer potential buyers with fall right around the corner, the existing inventory remains low, so getting a house under contract can still be problematic, Smoke said.

“Don’t expect sellers to feel desperate,” he said. “Sellers may still act like it is the spring. Listen to the advice of your realtor on the composition of the initial offer so that you are more likely to keep the conversation going rather than face complete rejection.”

While you continue to search for another home, maintain your savings and increase the amount of your down payment and keep paying down your credit cards and student loans. Consumers who will be receiving a bonus in December should include these funds it into their down payment. If the interest rates for your credit card rates are fairly low, consider bulking up your down payment since mortgage rates are very low, said Colby Sambrotto, president of USRealty.com, a New York-based online real estate broker. said. These measures will help increase your odds as you house hunt.

“Ask your lender to recalculate your loan preapproval to reflect your updated debt-to-income ratio and the greater amount you can put down,” he said. “That can reframe your search parameters.”

Down payment assistance is available through employer and community group programs. Some companies will offer loans if you remain employed there for a certain number of years, said Sambrotto. A good source for more information about various programs is Down Payment Resource.

“The loans are usually geared to encourage employees to buy around a certain area, usually within walking distance of the employer,” he said.

Location is Key

Transportation can emerge as a “hidden cost” if your commute includes costly tolls or you want quicker access to cultural and sporting events, schools for children, shopping districts and professional education opportunities.

“Narrow your search to neighborhoods that offer economical options for commuting and routine errands,” Sambrotto said. “Look for neighborhood groups on Facebook and ask to join the conversation so you can quiz current residents about the true cost of living in that area.”

While homeowners might prefer a standard standalone house, a two-family duplex might be a better option, said David Reiss, a law professor at Brooklyn Law School in New York. These homes have a clear advantage because they generate investment income along with various financing, tax and capital gains advantages which the traditional single-family house does not have.

“Think through your preferences and then take a fresh look at the market,” he said. “You might have that idealized picket-fenced house in mind, but a duplex will expand the number of houses you can look at. They also bring along all sorts of additional maintenance responsibilities with them, so they are not right for everyone.”

Risky Rent-to-Own

photo by Steve Snodgrass

The Pittsburgh Tribune-Review quoted me in Rent-to-Own Option for Home Shoppers Rife with Pitfalls, Experts Caution. It opens,

Finding the right rental house was more difficult than Phyllis Lombardi anticipated.

“It’s hard to find a big enough house that allows pets, for the number of people we have in South Fayette,” said Lombardi, 45. She and her husband have four children living at home.

The Lombardis are moving because the owners of the house they are renting want to sell. But the couple isn’t ready to buy. The husband’s income was cut by more than half when they relocated to the Pittsburgh area several years ago, and they are repairing their finances after a short sale on a home.

Finding no rentals in South Fayette that meet her criteria and price, Lombardi is going with an option suggested by her real estate broker: Pick a house for sale on the market and do a rent-to-own contract with an investor who would buy it.

Rent-to-own agreements require prospective buyers to pay rent with an option to purchase the house at a later date, usually within two to five years. It can broaden the options for people with checkered credit histories who think they might soon be in a position to buy.

But it is an industry with a lot of shady operators and which can prove costly to prospective buyers who are not careful, said David Reiss, a professor of law at Brooklyn Law School.

“In some cases, these programs are based on the idea of hope springs eternal,” Reiss said. “But a large percentage of them are likely to fail.”

The terms of these contracts vary, but renters often pay a premium above market price, with a portion of that going toward the eventual cost to buy the home.

Many times, renters reach the end of the agreement and are still unable to buy, forfeiting everything they have paid — rent, fees and any premium toward the purchase price — to the owner and walk away with nothing, said Max Beier, a real estate attorney Downtown.

“Traditionally, what you’re going to have in these agreements is a default provision that’s pretty harsh,” he said. “Commonly, you’re going to lose 100 percent of the equity you’ve paid.”

And many don’t come with the same renter protections. For example, maintenance and upkeep costs are often the tenant’s responsibility — just as if they owned the home.

Also, the penalty for late rent payments tends to be more severe than the standard 5 percent for a late mortgage payment, and even cause someone to be kicked out of the home, Reiss said.

“The rights you have as a tenant in a rent-to-own situation are not as clear and not as good as if you were a homeowner,” Reiss said.