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I was out last Friday night with a friend whose condo is under contract and also has an offer in to purchase a new home. In the course of discussing the trials and tribulations of simultaneously buying and selling she struck a chord that I've heard played with shocking frequency these days. She was utterly stupefied trying to comprehend how buyers were making decisions on how much to put in an offer for or whether to put one in at all. In her particular case her condo had been on the market for months without a single offer. The original list price was slightly above what she and her husband thought it would sell for and their hope was that someone would lowball them and then they could negotiate up to around their target price. To their surprise no offers came in. They decided to lower the price by about $15,000; not chump change but also not a huge reduction. Almost immediately after lowering the list price, they had an offer come in at nearly the new price. They were taken aback by two things. In this buyers market, how had they not gotten more low offers on their original list price, and, after lowering the asking price, why was the offer they received so close to what they were asking for and why had this buyer not put in the same offer when the list price was slightly higher?
Her statement of bewilderment is one that I have heard echoed a great many times in recent months. It's as if buyers and sellers are playing in two completely separate games. Neither side quite understands the seemingly erratic and senseless behavior of the other. I wanted to address this from a buyer's perspective, mostly because the seller's side is more often riddled with complexities specific to each situation. Sellers are likely dealing with carrying costs, original purchase price, existing mortgage debt, and a whole plethora of other factors that are influencing what they are listing a house for. When it comes to making an offer, the buy side is a bit more straightforward.
Part of our problem is, as Americans, we do not live in a society dominated by the barter system. With the exceptions of homes and cars, most of us do not spend much time haggling. Things have a price tag. Either you buy it or you do not. We take solace in things having a fixed value. To a certain degree we are unbothered by something costing more than it is truly worth as long as we know everyone else is paying the same inflated price. Let's face it. No one knows what the intrinsic value of an iPhone is. Apple tells us how much they will sell it to us for and we decide whether we want to pay it. As a result most Americans feel uncomfortable when put in a bartering situation. We are stricken by two competing fears. The first is that, if we make an offer too low, we will somehow be insulting the seller. The second is, since there is no hard and fast price set, we have that nagging voice in our heads asking if we could have gotten it for cheaper. Then we really start muddying the waters by trying to telepathically deduce how the seller came to their listing price. Are they pricing high with the expectation of getting bid low? Do they need to move right away and so they are asking near their floor? With every each of the twisted logic string tugging against the others, people can find themselves in a bit of a real estate neurosis, paralyzed between the fears of offending and being ripped off. We have two options as buyers to fix this. One is the creation of a field of psychotherapy focusing on nothing but this particular ailment. The other is that we simplify our outlook on putting in offers. Personally, I think we have already created enough reasons to sit on a therapist's couch so I am going to pull for option two.
I am not suggesting that a buyer ignore material facts. If you know that a seller is in a bind and absolutely has to move a piece of property than by all means, use that to your advantage when coming up with an offer. What I am proposing would be beneficial is if we stop trying to glean the unknowable. Assuming a traditional sale (short sales and foreclosures are a completely different beast) buyers should take a much more tangible and logical approach to determining an offer. Do your homework. Talk to your real estate agent. What are the comps in the area? Make sure those comps include sold and current market inventory. How do those comps compare to the property in question? What can you, as a buyer, afford to pay and how much are you expecting for your money? If at the end of the day you think a house is worth $350,000 and it's listed at $500,000 don't be afraid to put in an offer down at that $350. The worst that is going to happen is the seller will say no. You are not on the hook for anything if you get turned down. You never know for sure what the sellers pricing motivation is.
When addressing the notion of overpay worries, the best advice I can give is to let it go. Remember, we are talking about the process of putting in an offer, not closing. Obviously there are a great many speed bumps that can happen on the journey from one to the other that can drastically affect the final sale price of a home. Listen, in most cases there is no way to be certain that you got the absolute bottom of the barrel price from a seller. If you have armed yourself with knowledge and aligned yourself with a capable real estate professional, you have to have faith in your decision. In a traditional sale you still have an appraisal forthcoming to help protect you from closing on a lemon. You have a home inspection to give you recourse if the house is in a state of repair below your expectations. You have the joyous and rose filled attorney review process to ferret out detail related disputes. The road from offer to closing is stressful enough. When making an initial offer, try to think as simply as possible. What is this house worth? Remember, the list price is just some numbers on a page.
Though it may be difficult to work your mind around, now is a great time to be buying real estate, and not just for first time home buyers. Homebuyer’s Tax Credit extension aside, there are any number of reasons to make a real estate purchase right now, even if it involves taking a loss on your current home. Before you brand me as a lunatic or just a pushy agent just trying to make a commission, realize to see what I just suggested may involve a paradigm change in how you view your home. The fundamental shift folks need to make in approaching the real estate market from both a buyer’s and a seller’s perspective is in viewing their home as a portfolio investment and being realistic about its return potential. Gone are the days of making a quick buck for nothing just by sitting on a house for a year. We need to start treating our homes like we do our 401k’s and start thinking in the long term rather than immediate return. If we can view our home investments as part of an overall retirement package, lumped in with our 401k’s, IRA’s, savings accounts, and all those other things we nestle away for our gray and silver years, we can start making smart decisions that fully take advantage of the current market.
First, let’s put some tangible numbers on what the current market really is. Below you will find a chart from the Case-Shiller index, which tracks the value of home prices in the U.S. Presented in the context of home values over more than the last 100 years, our latest boom was staggering and clearly unsustainable.
If the projected bottom is correct, it will represent over a 43% correction in home values since the peak. The nearly vertical rise and fall of the housing market since 1997 is unrivaled even by the Great Depression. I’m bringing attention to this most recent stalagmite of a market shift not as a scare or a shock and awe tactic but to illustrate that the market has corrected, not crashed. If you were to draw a market trend line from World War II up to the present, what you would see is about a 4% increase in home values, factoring out inflation. Where ever it is you choose to point the blame, we created an unsustainable, man-made inflation that has essentially corrected back to where it should be.
So how is this relevant to buyers and sellers in the present and how do we position ourselves to benefit? For first time buyers the benefit is obvious. Housing prices are down at around 2003 prices, give or take. Homes are just cheaper now than they have been in recent years. On top of that, there is the whole rent verse own argument that is lengthy enough that it deserves its own piece. For existing homeowners the issue is more complicated but can still end up in a net gain if the goals are set appropriately. One of the things that the Case-Shiller index illustrates is that home ownership only works as a short term windfall investment within very short windows of time and, if your timing is off, the potential losses can be catastrophic. It also depicts a market that shows a consistent gain over the long term. That consistent gain, along with historically low interest rates are what move-up buyers need to see as the reason not to just hunker down and try and ride out the storm.
Crunch the numbers people. What you may well find is that you stand more to gain by taking a hit on what you currently own and buying up. First of all, interest rates are going to go nowhere but up from here and the smallest change can have a huge effect on your loan’s bottom line. A difference of just one percent on a $300,000 mortgage adds up to $3000 of interest in the first year alone. Imaging what you can save over the life of a 30 year mortgage. To put it another way, let’s assume a 30 year fixed rate mortgage of $100,000 dollars. Here is how the numbers break down at 5% vs. 6%:
The differences in total payments and interest payments are in the tens of thousands of dollars and this example is only one percent on a relatively small home loan. On top of that, the savings in yearly payments is over $750. The implications of these numbers are numerous. On a move up purchase of $400,000, if the buyer is hesitant to sell their existing home because of the current market value and the interest rate they could get on their new loan goes from 5 percent to 6.4 percent in the mean time, the difference paid over the life of that new loan is almost $180,000. These are big numbers we are talking about here.
Secondly, as the market bottoms out and starts to trend upward again, the bigger your stake in that market the more quickly you gain equity in your home. Let’s say that market recovers at 1 percent the first year and 3 percent the following year with annual average of 3 to 4 percent over the long term. The equity gained from the increase in your home’s value is much larger if the initial value was larger.
All that being said, every individual situation is different and merits a thorough financial evaluation before making a decision as to how to act best. The point of this rather wordy rant was two-fold. The first was to illustrate that we need to start looking at our home purchases as a piece of our overall financial portfolio rather than an instant cash cow. You don’t necessarily have to stay in your new home until you retire but you should be thinking about how it factors into your home buying plans up until retirement. The goal should be to make all your home buying decisions as part of a long term investment plan that maximizes your return when you do decide to retire. To tie that in to the final point of my diatribe, it may actually be prudent to take a loss on your current residence in order to achieve the most net worth in the long run. This isn’t my way of trying to push people into buying or selling a home today. For many people this model just doesn’t play to their advantage and they should stay exactly where they are until the numbers say otherwise. All I am trying to say is that we all need to look past the emotional roller coaster of what is happening currently and see if there is a way to turn it into a success down the line. Happy hunting!
Taking on the massive amount of debt associated with a mortgage is often the most terrifying part of the home buying process. You’re agreeing to owe an amount that’s easily ten or even twenty times what you paid for your car. On top of that, it’s most often a thirty year commitment and thirty years is a long time. Things have not gotten any less stressful in the current market. Lenders are tightening their restrictions and asking buyers to assume more of the risk of home owning. Just getting pre-approval these days involves a mountain of paperwork. You’ll be dusting off old W-2’s and pay stubs, assuming you even know what random envelope you stuffed them in. Then there is the nail biting while credit scores and histories are run. For first timers especially, it can be quite overwhelming. Although the options available for financing a home purchase have dwindled as the market did the same, for someone who is new to the game, it can still be a mountain of information to digest.
Any good agent will tell you that getting pre-approval is the first step in the process because it informs you as to the price range you should be shopping in. So here you are. You finally have some money in the bank. You’ve been eating Ramen Noodles and riding your bike to work every day to try and scrape together the money for a down payment. You’ve been paying down those credit cards you signed up for via mail in college. In your mind, you have become the responsible adult your parents always wanted you to be. You’re ready to get that pre-approval but you aren’t sure what type of mortgage loan is the best for you. To be sure, any loan officer worth his or her salt will help guide you to the right mortgage for your unique position but it is always nice to have as much information as possible going in so that everything doesn’t sound like Latin to you.
One of the loan alternatives out there is through the Federal Housing Administration (FHA). Getting an FHA loan can have a number of advantages. Too many to cover without putting you to sleep in fact, so let’s just go over some of the big ones to start. The first and most well known is that your down payment can be as low as 3.5%. That is significantly lower that most non-FHA loans. The shrude frugality involved in saving the thousands and thousands of dollars needed to put up a 10% or 20% down payment is a trait that doesn’t come naturally to a lot of us. It can be frustrating to know that you have a good, secure job that would easily cover a monthly mortgage payment but you just haven’t been able to stockpile enough cash for that down payment.
The second advantage to an FHA loan is that if you meet the minimum credit score to qualify (600) there is no adjustment to the APR on your payment based on your credit score. For those that have struggled to raise their credit score this can be a huge boost. You can get the same interest rate on your loan with a score of 650 as you would if you had perfect credit. And remember, a seemingly tiny difference in your APR can amount to huge dividends on a mortgage that is amortized over 30 years.
There are two lesser known advantages to FHA loans that most people don’t know about. The first is that you can have a co-signer for your loan. Conventional loans will allow for a co-signer but the overwhelming onus for proving repayment ability is still going to fall squarely on the primary’s shoulders. The FHA will allow for a co-signer to be a much more significant player in securing a mortgage. The last little tid bit about FHA loans that goes overlooked is that they are assumable. For those of you that don’t know, an assumable loan is one that allows for a buyer to assume the existing mortgage from a seller as opposed to going out and getting their own loan. Because of how low interest rates currently are, a buyer that gets a loan through the FHA right now could see this fact really help them when it comes time to sell that home. Over the long run, most experts agree that interest rates are going to go nowhere but up. Imagine when you go to sell your home in 10 years, how tantalizing it would be to a seller that they could assume your loan at 2% lower than anything they would be able to get at the time. It would certainly give you a leg up on some of the other inventory.
I have been doing nothing but pointing out the shiny silver lining of FHA loans but they are not the perfect solution. All FHA loans have to carry mortgage insurance. This is an added expense. On top of carrying mortgage insurance, FHA loans come with an upfront mortgage insurance premium of 1.75%. The bottom line is that FHA is not for everybody. If you have great credit and a big savings account, a conventional loan will likely serve you better. There are a lot more facets to what the FHA can offer that will be addressed in future posts. For now, happy house hunting folks!
Good news folks! Today President Obama signed into law a bill that will extend the Homebuyer Tax Credit until June 30. That means closing date. To be covered, the contract to buy has to be signed by April 30. The original legislation allowing for an $8,000 tax credit for 1st time homebuyers stands but there are a few added bonuses to this newest round.
The first is a significant raise to the income cap for eligible buyers. It is up to $125,000 from $75,000 for individuals and up to $225,000 from $150,000 for joint filers. These figures are based on adjusted gross income. The second major addition is one that allows some existing homeowners to qualify for a tax credit when purchasing a new home. A $6,500 dollar tax credit will be available for existing homeowners who are looking to purchase a new home if they have been living in their current residence for at least five years. The maximum price tax for an eligible home is $800,000.
We are on the brink of a very positive step towards the recovery of the U.S. housing market. The Senate is quickly nearing passage of an extension of the Homebuyer Tax Credit. Not only would extension lengthen the time that first time homebuyers would qualify for a tex credit, it would add a new credit for move up home buyers who have been living in their current residence for 5 of the last 8 years. All of this is explained in much greater detail in an article published in Real Estate Economy Watch. We at @properties are excited for what this could mean in aiding potential buyers and sellers acheive their real estate goals.