ARMs as a means to get lower rates in a higher rate market

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Feds are hiking rates. Consumers are eager to find substitutes. The adjustable rate mortgage, or ARM, may come back in style again.

Why is it useful? They are hybrid programs offer lower interest rates than the traditional 30 year product as a way to entice consumers to agree to shorter fixed intervals.

Loans make money throughout its life. If the rate is better in the beginning for the consumer, the bank making the loan hopes to make more money in the later stages of the loan. If the opposite is true, the bank will make more money in the front end. This is what occurs in the primary mortgage market. The secondary mortgage market involves selling bank notes and bundling them at discounts for other note holders to purchase, but that will not be discussed here because we are focusing on how the consumer can get better rates.

ARMs have had a bad reputation as they were part of a toxic loan underwriting culture during the mortgage meltdown of 2007, but if their terms are disclosed fully and the consumer consents and understands them, there is no issue to try these products that offer some fixed interest rate and, later, a variable rate interest down the road.

How do we navigate a real estate market with a higher interest rate?

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We see the price changes. We see the pending sales fall out escrow. Buyer remorse could hit during the transaction or after. It’s no surprise. Buyers have to pay more for a loan, almost 70% more from a few years ago. Supply is still low but buyers are feeling the cost of purchasing rising, so contenders are falling out of the race and sheltering in the rental space.

I kept telling my clients that the older 3% interest rate on the 30 year fixed product was a steal. Loans being made at 3% is basically free money. If you have that rate, you should congratulate yourself.

Cash position buyers are unaffected by interest rate hikes but they could have better bargaining positions when submitting to sellers.

Buyers need to look at the numbers and see what their monthly liabilities with the new interest rate. Once that number is obtained, it can be contrasted against their current living expenses. They needn’t forget that the home purchase is also an investment that appreciates and they may have a return on that as well. In addition to looking at the numbers, ask yourself how long you intend to occupy the property. Mortgage loan originators are essential here to provide this information to you.

Imagine yourself looking at properties that have spent 30 days on market and have went through 1 or 2 price changes. What should you do? Look at the comparable sales and see what the competition is for this house and determine if any other houses are substitutes to this house. If you feel the house will not go pending by anyone else, calculate a trend of the price decline in your specific neighborhood and discount the property based on that trend. A realtor can assist you with this.

So looking at the numbers plays a large role in how you will proceed. While interest rates are up, don’t be discouraged. You will get a price discount that will help you out. If you own already and want to purchase a larger home, ask the MLO what it will take to rent out the existing property and buy the next property. It could be the start of your own real estate portfolio if you consider it carefully.

 

 

How to find out your maximum purchase price.

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With all the bidding-wars going on, what is the final price going to be, and can you afford it?

Many people approach me with this question. While I am the Realtor, this question is really answered by one of your allies– the Mortgage Loan Originator, or the one who qualifies you for the home loan.

After you submit your financial documents, a pre-approval is generated showing your maximum price you can be loaned on the purchase. The seller may not know this highest value, so that is why it can be tweaked for offer purposes.

When offers are submitted, you may be subject to counter offers. These could increase your original price beyond what you are qualified for. When this happens, it is called “Priced Out”. It’s a situation that can be avoided when your Realtor shows you properties that you qualify for with margin of error for counteroffers.

When you link up with a Realtor, the notifications get made, the qualifications are in place, and you can be successful with your home purchase with ease.

Why Looking at online real estate without being qualified is hurting your financial progress.

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We’ve all done it. We look at real estate online and share it with friends, make comments about how bad the carpet looks or how expensive it is. We joke that there’s jumpscares in the drab living room and the walls are yellowed and peeling. It’s a hobby for some. Unlicensed casual real estate agent, they would dub themselves. I’m here to explain that if you are en route to buying a house, that this practice could hinder your financial progress to making your first real estate purchase.

Let’s clear the air first. People do this for leisure with no intention of purchasing a house, ever, because it’s fun. I’m not addressing them. I’m addressing the people who intend to buy a house but they have not spent the time to sit (well… it’s virtual now) down with a Mortgage Loan Originator to get the proper qualifications. Looking at homes you are not qualified for may be interesting from a research standpoint, but is only postponing your actual purchase.

Here is the deal: looking at houses is actually a very draining activity. There’s lots of details, pictures, disclosures, etc. Some clients drive out of town every weekend to see houses and they come back exhausted. Try looking at 5 homes 80 miles away using both weekends for 5 weeks straight– you are going to feel the burn out.

When you look at properties online, you are subjected to a lot of data, and you only have a finite amount of time to actually process this data. If you intend to buy a house and you’re looking in your area, there’s no telling if you qualify for this house or not until you get the pre-approval letter from the lender.

I’ve insulted people when I claim they are looking at houses they cannot afford. It’s an intrinsic sense of pride to look at things you can afford. They tell me they know they can afford it without needing the qualified letter, because they have means. While this may be true, expressing an interest in a house you want to buy without being qualified makes you behind all the buyers who already got qualified. There’s offer deadlines. Lots of competition. You need to step up and play the game and get qualified. Why give yourself a delayed start in the race?

Getting qualified for a loan or making your cash liquid for purchase tells sellers you are serious in purchasing a house. It also tells you what price you should be looking in. Given your time is finite, looking at homes casually drains the energy required to actually look for houses you can afford. It’s OK to look at castles for sale but think of yourself and plan ahead if you are serious about buying real estate.

Beating cash offers in a hot Alameda County market.

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Cash offers are king. They dominate because there are less risks associated with the transaction. A lender doesn’t need to fund which shortens contract times. But how can financed offers compete?

Financed offers can remove some contingencies to make their offer more attractive. This can only be some under the serious counsel of a Realtor who can make judgment calls about how to make a financed offer more attractive without endangering the buyer.

Removing contingencies help sellers pick buyers who are more serious than other buyers. Out of 10 offers, all the buyers could be serious, but some may place higher bids, short closing times, and reducing contingencies that make their deposit not refundable under certain circumstances. Naturally, the seller wants to pick the offer that benefits them the most.

The next time you get discouraged by the belief that you are competing against cash offers, know that not all is lost.

Are Real Estate Sales Truly Slower During the Holidays?

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You must have heard it at least once. That real estate is slower during the holidays. It’s an anecdotal statement. But as a real estate professional who has seen decades of transactions, let me give you my anecdotal account.

I have worked on holidays– Christmas, New Years, etc. When people have to move, they have to move. Job relocations, death in the family, etc. These things prompt action. And these events do not wait patiently for important holidays to pass. When these things occur, there will most certainly be real estate sales during the holiday.

While buyers are often still in the dark about the seller’s reasons for selling, some of the reasons for selling could be urgent. If buyers are patient enough, they might be able to have less competition when sending offers.

Sellers will use everything in their power to make the listing sell quickly at the highest price– order pre-inspections, pre sale escrow, make repairs, stage the home. They have tools to convert buyers with the help of their Realtor. With enough activity on a listing, it does not matter if the holiday is happening or not.

A holiday is a break of sorts, just like summer. Sometimes persons uses this opportunity to make life transitions while they have these breaks because they are too busy at work to do it any other time. When school is out, parents my find an opportunity to move and purchase before kids start again.

For people who have full control over their buying and selling activities, looking during the holiday appears as an opportunity, but not always. I have seen both quiet and highly active buying and selling periods during the holiday, so I always tell my clients to keep their expectations in check.

How to Cope with the Lack of Housing Affordability of the Bay Area

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People are leaving the bay area and it’s depressing. They leave to find more affordable rent or more affordable housing with smaller mortgage payments. Seeing them go is sad. Yes, we can keep in touch. We can teleconference. We can videochat. We can be penpals. But the ability to plan in person hangouts with them is gone, or just more sparse.

There are some affordable routes to homeownership– I wanted to talk about them. They fall into the category of starter homes. They often pertain to condo living, mobile home living, or manufactured home living that lets people stay in the bay area and save up for larger purchases.

One example that can be found in Alameda, Santa Clara, and San Mateo county is the $400,000 1 bedroom condo. I see them practically everywhere. What does it take to purchase? Well, first understand that the loan rates are at historic lows. This means you will need anywhere from 5%-20% down plus about $10,000 of closing costs. If you can save that in 1-2 years you can stay in the bay area and make the purchase. Why are there so many available? There may be a high turnover rate for them because others have saved money to buy more property. People may be tired of paying HOA payments and finally saved up for a single family home. Investors may have earned enough to purchase more investment property and they need to 1031 exchange the existing property. Just because there’s a lot of inventory in this price range does not mean it is undesirable.

If you need something even more economical, let’s talk about mobile homes. Mobile homes are module-style homes that sit on rented land for which you pay a monthly space rent. The sum of your space rent and mortgage could still be smaller than paying rent. Not only that, but because it is an investment, you can sell it later down the line, making it superior to renting. These purchases are often sub $300,000 even in high cost areas like San Jose. The one thing I would caution is that sometimes mobile homes do not appreciate as fast as single family homes, so do not expect a huge boost of equity. With a lower purchase price and lower dollar per square foot cost, you could have spacious living areas at a fraction of the price.

What do you do after purchasing these places? The hope is to save for larger purchases. By selling your starter place, you can step up to your next purchase.

Looking at properties? How to turn yourself from lookie lou into serious buyer.

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The Casual Surfer

Looking at real estate listings online has been a pastime by many individuals who want to kill time. It’s like browsing on TikTok– a menagerie of things to look at without end and can be addictive. There is joy to look at these listings and then move on with your day.

Your Time to Get Serious

After a while you may be wondering: What’s out there for me? That is when you need to qualify for a loan approval letter. Call your HR at work or go to your local bank to get leads on getting approved for a home loan. Why is this important? Doing this defines your search and places maximum values on your affordability. You wouldn’t go car shopping without knowing how much money you have in the bank, right? The same principle applies here.

Getting Your Loan Approval on Time for that Dream Home

The most dreadful situation is wanting to purchase a home and then not being ready to buy it. This happens when you do not have the loan approval and you see a house you like. These houses are competitive– with offer deadlines as early as 5-7 days from the time you see it. Waiting for an approval then making an offer will take too long and will be very stressful.

Plan Ahead

You’re going to find that getting a loan approval and sitting on it for 6-12months is a great spot to be in– you can browse homes on the weekends and evenings until you find a place you like. Some buyers want something much sooner and sometimes a long search isn’t possible. This happens when buyers search out of town and every weekend they see property is a long trek that wears them out. Be mindful of how much time you spend browsing homes and make a firm decision with your counsel.

Immediate Relief for California’s Housing Crisis? All it Takes is a Change in Mindset

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The housing crisis being described right now in the media is one wherein prices are high, demand is high, and supply is low. Economists can predict a recession only due to the cyclical nature of our housing and stock market, but they cannot provide a reason for the future downtown. One offered solution is to build more houses because building more houses provides supply to the market and can reduce prices. To some extent I think this is true. But there’s a more fundamental problem that plagues our housing crisis: our idea of privacy and ownership.

What I’m proposing isn’t original. We already have multigenerational families who live under the same roof (grandparents, parents, kids, nephews, etc.). What I propose is that people change their mindsets about individually owning a house and decide to band together with friends and family to all own the same piece of property together. Our legal system already accommodates this arrangement in place through the use of tenancy in common or joint tenants—legal titles of persons who wish to own property. These legal titles go on public record and tell the world how the property will convey if that person passes away.

Here’s an example: Jones and Mary have been friends for 4 years and they both found themselves complaining about the rising prices of housing in the Bay Area. They each have their own families and they can qualify for a home loan but their maximum purchasing power is lower than the houses they intend to purchase.

So what if they approached the same lender and decided to buy a house together? I think they would have to make several considerations first: whether everyone’s on board with it, how will they take title, and does it make sense financially?

Let’s just skip to the financial picture: if you split a mortgage payment with another family unit, you’ll be really pleased about how affordable it is versus renting the same amount of space. Not only will you never have a landlord asking you to move out, but you’ll be building equity over time which can be later cashed out.

The other considerations are rather straightforward. You and your spouse come to terms on whether you can live with another family if it means getting higher purchasing power. Taking title is also somewhat straightforward. If you don’t want to have other persons on title to take your share when you die, then choose tenancy in common which lets your heirs take the share upon your death. This is of course a legal matter so please do your research in this manner, but the common sense approach is to let non-family members not take your share when you pass.

I think at this point your gut might be saying as an objection: but why do I have to compromise my housing situation just because they bay area is so expensive? One reply to this objection is that our society has built of the idea of individual ownership for everything that we likely have not considered the possibility for owning the same house with multiple people. And yet, when we rent, we seem to have no problem splitting the rent between people as if there were no compromise whatsoever. So if people split the mortgage together, is it any different than people splitting a rent check between each other?

Lastly, I think the major hurdle in getting this all started is this: I don’t think people know how to approach other people to decide to buy property together. It’s a foreign thing to suggest to others and it could make people think less of you. “You’re asking me to split a mortgage with you because you don’t make enough money to support your own family?” It’s a disgusting thought but I think people have a lot of pride in their family to solely provide for their own families that if they ask for help in any way they are perceived as weak and getting a handout. Another consideration is that it’s almost like writing a will—everyone should do it but no one gets around to it. But if people can communicate their financial situation better to others and if they weren’t ridiculed for it, or if a service did that, people could be better off. All it takes now is for people to band together, band their finances together, and see a mortgage lender together, which is something that rarely happens but I think needs to happen more if you want to see immediate relief in this so-called housing crisis.

 

The KnowHow Involved in Submitting a Purchase Agreement is Quite Large and Involved

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Unaware buyers may think submitting a purchase agreement is something done automatically by a Realtor. It is quite the opposite. Submitting a purchase agreement is a careful and deliberative process with hundreds of moving parts and lots of consideration required for the Realtor before making the submission. We’ll go over some of the considerations that take place before submitting the offer.

The residential purchase agreement is 16 pages long. It used to be a single page before 1970, but has been added over time to cover stipulations that are necessary for both parties to clarify. Whenever a lawsuit occurred, more language was added, to both parties’ benefit.

Seeing the perfect house and then moving on to sign a 16 page document can be cumbersome. Clients of mine who work 8 hours and then have to sit down to read 16 pages of small text will feel burdened. Others want to do the close reading with me and I’ll gladly do it. Others want the paraphrased version. As long as they understand that they must read and understand it before signing, it’s up to them how deep they want to engage the document.

One thing I will say is that I know this document like the back of my hand—I know where the most important clauses are, where to ask for certain things at certain points, and how to modify certain clauses to get the most out of the exchange. That is why pairing up with a Realtor to draw up this document is necessary.

One know-how aspect of modifying this document is to make sure the buyer complies with any point of sale ordinances and customs of the local area. There are transaction-related customs that buyers and sellers adhere to that streamline the process of purchase. While all items in the agreement are negotiable, having a streamlined purchase agreement simplifies the seller’s reading of the purchase agreement, which allows them to compare the submission with others. Think of it like tailoring a resume to fit the employer. That is what happens every time we submit the offer.

A second know-how aspect of offer submission is the Realtor’s ability to gather information and sleuth around, and take that information back to the buyer to have the offer submission be the best it can possibly be. This intel gathering could include getting comparable sales data for the buyer, and also chatting with the listing agent to determine the amount of submitted offers. If the number of submitted offers are unknown, the best alternative is figuring out how much interest exists on that particular property, by figuring out the number of times it was shown, how many people attended open house, etc.

Ultimately the Realtor will write in specific clauses, add addenda, and make other pertinent suggestions to make the offer submission not only flawless, but free from vagueness and keep buyers out of court. Realtors ultimately have the bird’s eye view to clarify language and get ambiguity out of the picture at a time where everything must be written down and accounted for. If a novice were to make these acts without knowing the local laws, point of sale ordinances, or customs of offer submission, one would not get very far in the process and may be overlooked. Sellers perceive incompetent offer submissions are time wasters and may be overlooked. When this happens, the perfect house you saw may not be available for you.

I hope I outlined the various facets of how a Realtor aids buyers in the offer submission process and how critical this step is in the home purchase process. I make it a point to draw up the purchase agreement in a few hours time to keep my buyer within the offer submission schedule, but just know that I am proofreading the contract several times and reviewing laws as needed to keep my buyer’s interests preserved and at heart.