Category Archives: first time homebuyer

The Consequences of Rising Interest Rates for Borrowers in their New Home Loans

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Every once in a while you will hear that the Federal Reserve and its power to influence the money supply will raise interest rates. I intend to talk briefly about how this directly affects the consumer who intends to obtain a home loan after the rate increase. The main objective is to find out how much monthly additional funds are required for the mortgage payment. After doing this analysis, we will decide whether the rate increase is too costly or if it is affordable for the borrower of the funds. This analysis is not applicable for those who wish to make cash only purchases, however those who are debating between the cash purchase and the loan purchase can continue reading to get an idea of the cost of the monthly loan payments.

First let us start with a few assumptions: Let us suppose you want a 30 year fixed loan, 4% interest rate, $500,000 loan amount. With this information, we can now solve for the monthly payments. The monthly payment is $2387.

Scenario 1: What if the interest rate rises to 4.5%? The payment rises to $2533. That is a $146 difference.

Scenario 2: What if the interest rate rises to 5%? The payment rises to $2684. That is a 297 difference from the original amount.

Let’s make an interpretation of these data. Namely, what is an extra $146 a month, or $1752/yr? That amount could be the amount of your monthly coffee bills, or monthly going out for good cost. It could be a fraction of your grocery cost. In the big picture, the increase is not that much.

One objection to this is that it could be substantial if you don’t have that much extra funds, or you have a very demanding lifestyle where you need to eat out a lot.

One reply to this objection is that the cost to obtain this money is inexpensive. When we take out a home loan, we are accelerating our means to purchase a home. In return, you make payments to cover the loan until the loan is due or paid in full. Imagine if you had to wait until you saved $600,000. Wouldn’t that take a while, conventionally speaking? Instead, isn’t it faster to save up $100,000 and get the rest in the form of a loan? That is what the loan accomplishes. The rate increases are inconvenient to the borrower but they may not be as groundbreaking as people believe.

In summary, you might find interest rate increases inconvenient, and they might be more than inconvenient when the rates spike. However if the increases are only in small increments, you might find the cost of the monthly mortgage payment to be slightly more expensive, but tolerable, and not earth shattering as some people tend to believe.

 

Notes on Reading Home, Roof, and Termite Inspections

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After your purchase agreement is accepted you will usually have a window of time to perform inspections. This is your chance to investigate the condition of the property. The most common inspections obtained are the home, roof, and termite reports.

Home Inspection

The home inspection is a general overview of the house, outlining the materials used, the useful remaining life of the structures, and any notable safety or health issues. Pictures are included. As a future homeowner, you will want to look over these items to see which items will need immediate action after possession. Earmarking the document for this purpose will keep you updated on maintenance. Generally, smaller issues can sometimes grow into larger issues over time.

Roof Inspection

While the home inspection mentions the roof, a separate roof inspection is always preferred since it is likely to be more detailed and generated from a roofing contractor (versus a more general contractor or inspector). The roof will mention the immediate deficiencies and the remaining useful life of the roof. An additional charge could get you a 2 year warranty on the roof if you elect the company for the repairs.

It’s best to make roof repairs over the summer while roofing contractors are not busy. I have tried to setup roof repairs during the rainy season for my clients and it is not fun since roofers are booked months in advance.

Termite Inspection

The termite inspection does not only look out for termites– it looks out for damage to any wood members in the house, whether it be from termites, or fungus damage. The findings should be read together with your real estate professional. A bid for work can be found at the end of the document. The lender generally does not have access to this document unless it is explicitly stated in the purchase agreement, however some government related financing agencies may require that work from the termite inspection be completed before loan funds can be given to the escrow company. This is called Section 1 Termite Clearance.

Dealbreakers

Sometimes after review of the report, there might be substantial work in one area of the house that the buyer cannot afford or prefers not to repair. In this instance the buyer has the right to back out if the inspection contingency exists. An alternative to backing out would be to return to the seller to renegotiate the price. Renegotiation will change the original terms of the contract so expect the seller to defend the original terms of the contract, and proceed accordingly. I really cannot specify what constitutes a dealbreaker. People who want turnkey houses may be very picky over those who have decided in advance that they are willing to make repairs.

When to Repair

Buyers, as future homeowners, are at a significant advantage when they can repair after close of escrow versus repairing before escrow closes as a condition of loan funding. Making repairs after close of escrow allows homeowners to shop around the work and the bid and potentially secure same quality contractors at a lower cost. The homeowner may even be able to some repairs themselves. On the contrary, when buyers must repair before close of escrow, their options may be limited only to those contractors who can make the repairs in a timely manner. The repairs may need be done exclusively by a licensed contractor which may limit the buyer’s ability to make the repairs themselves since doing so may pose a risk to their loan funding.

Buying a New Home? Prepare for Potential Delays and Progress Conservatively

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Being Flexible

It’s not all the time that there are delays in real estate transactions, however preparing for them is a humble gesture of showing all the professionals helping you that you are flexible.

Early Stage vs. Late Stage Development

After recently closing a few new home sales, there’s a few important things to point out. The first is that each builder has their own phases of development. When the builder’s offering matures, there are less variables that can delay the transaction. It’s always best to ask the builder which phase they are in. It’s one of the first things I ask. Prices might be better at the start, however expect delays since the builder is working with the city, contractors, and multiple parties. If it’s a later stage development, you might be able to pay a little more but you get the security of the builder’s track record for that specific development.

How to Protect Yourself

After you sign the purchase agreement with the builder who is the seller, you have certain liberties of when you give notice to landlord to vacate or when your rate lock starts for your interest rate, assuming you are getting a loan. If you do these items as late as possible, you’ll find you will leave elbow room in the transaction for delays.

Another way I can offer advice for creating leeway is to let your move out date from your rental be later than the closing date of your home purchase. Doing this gives you a huge cushion to move and for any delays.

Why Do Delays Happen in the First Place?

Delays happen because multiple parties are trying to achieve the same goal, and you can see that if one party falls short of the promise, everything else is held back. One of the reasons why real estate brokers and salespersons are so valuable is because your professional can detect and resolve issues before they become game breaking delays. Delays can also occur when the seller or buyer do not perform, so it is also critical that you, the client, performs in the best way possible.

Buyer Beware: Preserving your Sanity in a Low-Inventory Market

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Homer thinking hard about his next home purchasing strategy

When buyers want to purchase real estate and there’s not too much being offered, losing out on offers can be frustrating. What I want to discuss is how to maintain a calm and positive frame of mind while looking for property so that you will not give up.

Continue reading →

Why Realtors are like Doctors and why you can’t Self-Medicate

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Why Realtors are like Doctors and why you can’t Self-Medicate

The main purpose of this article is to draw an analogy between Realtors and doctors in the sense that both are professionals and that we should consult with them regularly for expert advice. If you believe we need expert advice from doctors, then so too do we need expert advice from Realtors.
This article has an apologetic tone to it for many reasons. The first is that the increased transparency of homes for sale empowers consumers to research homes in advance. This allows a more informed user. The same has happened for medical issues being available online. People can search for their symptoms and try to make conclusions about their health from their research.
If you have ever had symptoms and used search engines to identify what you could be suffering from, you can imagine it is a terrifying process. It is terrifying because there are so many uncertainties involved about self-diagnosing that we don’t have enough empirical knowledge or the background knowledge to come to a definitive diagnosis. So what do we do? We end up either acting on a false belief or we set the appointment with the doctor.
If we do the former, we do a self-medication. Suppose we had a viral infection and we think we have a bacterial infection. And suppose further that based on our false belief, we take antibiotics, hoping the infection goes away. Since antibiotics don’t work against viruses, we’re left with all the side-effects of taking antibiotics without the benefit of the cure.
So now let us return to the topic of real estate. When first time home buyers or not savvy persons of real estate think it is good idea to buy or sell the house themselves, it’s clear that they have their own best interests in mind, but it’s not clear that a professional has their best interests in mind. When the buyer/seller is self-represented and the other party has representation, the unrepresented party might ask help from that professional, but there’s no guarantee that that agent will help the other party out of generosity or other virtues.
I have had many sellers with whom I fill out forms, and it is sobering to see my sellers skip or flat out omit information on their disclosures because they don’t want to disclose something. They fear that disclosing something might lower the final price of their home. And they may be right. But when the property condition is not what the other party thinks, it’s a no-brainer that the price reduction in disclosing the material fact is far cheaper than the cost of damages in a lawsuit for the failure to disclose.
Putting the legal aspects aside, the seller/buyer needs to do the right thing and disclose the material facts of the property. The professional Realtor is there to make sure that happens.
I can’t stress enough how important the counsel of a real estate professional really is. A 30 day close requires a lot of coordination and precision among the parties and many things can be missed as a result. A do-it-yourselfer might try selling the house themselves, but any delays in the process could be costly, resulting in per diem fees owed to the other party.
In any event, I hope I have drawn the analogy well between Realtors and doctors and I hope you will find the time to consult your professionals as needed when the time comes.

The Most Important Thing to Do Before Looking for a House

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The Most Important Thing to Do Before Looking for a House

Today, we live in a culture where information arrives instantly at our fingertips. Information about homes for sale is no different. Anybody can look at a house, whether they are old, or young, rich or poor; the information is available for anyone.

Now let’s think about only those people who are qualified to buy a house. Chances are they have large cash reserves or the minimally decent down payment needed to purchase. But even they might shop for a house without doing the most important thing they need to do.

So what is the one thing that is so important? The answer is simple: finding out your max price. Your max price should be known to you. If you are getting a loan, your max price is determined by your loan advisor and it may appear on your preapproval form. Your real estate agent will also have knowledge of your max price, even though you might think it is confidential information.

Why should your real estate agent have this information? She should have it because it places a cap on the searches she will do in finding your house.

Is your max price confidential information? Well, yes, it is, and it should not be shared outside of those trying to work in your best interest. That is why your loan advisor knows your max price, your real estate agent knows your max, your significant other knows your max price… and that’s about it. For everyone else, like the seller you are trying to buy from, you do not reveal your max price to them, for obvious reasons.

To be sure we are all on the same page here, the max price is your down payment plus your maximum possible loan amount you qualify for. If your preapproval letter shows your maximum loan amount, that is not your maximum purchase price. If you see that, add your down payment to determine your maximum purchase price. That is when the search truly begins.

Many of my clients ask me: “Let’s see property first and then I’ll get qualified.” Denying my clients of this suggestion might insult their reputation and pride, especially if they make it clear to me if they have the means to purchase property. So what do I do? For repeat clients, I usually oblige them and tell them that we can see property first and get qualified later. For newer clients, I have to stick to my guns and tell them that you must get qualified first.

Why do I stick to my guns? The answer is twofold: the first is that I am a professional. While the client calls all the shots for decision making regarding the purchase of the house, it is my responsibility to create the conditions that make success porrible.

The second answer has to do with time. I respect my clients’ time as well as my own. If we see properties without establishing the price range or qualification, period, then we are wasting time out on the field looking at properties the client does not qualify for. In fact, I have had many overqualified clients looking for property, only to learn that they have auto loan debt they forgot to pay down, student loans they did not touch for years, or other debts that may hinder their ability to get credit.

So when these issues are identified early, what can they do? They can fix them early when there is time to do. What happens if the issues are not addressed right away and the client insists on looking at property? The results can be disastrous, and let me explain why.

Imagine finding the house of your dreams but you are not yet qualified to purchase on a house. Because many sellers impose deadlines for offers, you are now against the clock in getting qualified for a loan. This puts pressure on the loan advisor and added stress on everybody. After getting qualified, now imagine that your max price is less than the listed price of the home you love, and let’s assume there are multiple offers out there on the house already.

From this case study of being underprepared to offer for a house, we see that the origin of the problem was not knowing what the max price is for a house before shopping.

So in summary, we learned that finding out your max price before house shopping is like putting the horse ahead of the cart—it is the smart way to go.

What the FSBO Wants

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For Sale by Owners (FSBO) represent only 25% of the sales of homes, while the other 75% of sales being those sold by Realtors. I want to first explore historical and cultural considerations surrounding this topic followed by a discussion of why FSBOs want to sell by themselves.

I think we exist in a culture that has a tension of Do-it-yourself and Do-it-for-me. People want to save money but also do not want to put in extra effort, and this tension or stalemate often gets people to not act or not act in their best interest.

FSBOs want to sell themselves because it is supposed to be cost-effective. It is supposed to be part of the Do-it-Yourself movement. It’s supposed to be a triumph against commerce and a way to line one’s pockets further with saved cash. And to some extent, these considerations are very representational of how the average consumer thinks today: to go straight to the source, cut out the middle man, and get the product direct.

But if since undercutting practices are so effective, why are 75% of sellers and buyers still using Realtors to buy and sell their homes? At this point, I of course have a long list of praises to sing for Realtors and their activities, but I will spare you the self-praise and give you a shorter list:

  1. Sellers won’t take the time to learn the legal disclosures required in selling a home – There’s tons of paperwork. It’s almost nauseating. But it’s necessary. Real estate law spans back several hundred years and the disclosures and customs are somewhat respected and retained from past rulings, making the corpus of real estate law quite large. It’s no surprise that FSBOs might have a hard time filling out disclosures to deliver to buyers. It’s a lot of headache, not just as a process but the legal implications of doing them incorrectly could very possibly give someone insomnia. If you’re lucky, FSBOs can reach out to Realtors to help them fill out the paperwork, then promise the Realtor to give them the listing if they cannot sell the house themselves. It’s a good gesture and the easiest way to make a friendship. So FSBOs—what are you waiting for? Call your Realtor and ask for help and make them that promise, now!
  2. Showing property takes time and effort, something a full-time seller might not have—While FSBOs can put up a push button lockbox and show the property remotely, there’s really no telling who will want to see the house, let alone figure out if they are qualified. And where are these people calling from? Craigslist? Trulia? Well, some might be serious, but it’s riskier (relatively). It’s riskier than having an agent set up a lockbox where only other agents can access the lockbox. And when a seller is working all day, how likely is it to get those showings in or actually answer buyer questions until that seller becomes available again? A seller that’s hard to reach by a buyer looking for a discounted property will be easily skipped over if other listings exist that are represented by an agent who is typically available specifically for the purpose of answering questions about the house.
  3. A FSBO may say they already have a Realtor, but why are they trying to sell their house on craigslist without any pictures or adequate descriptions?: FSBOs are regular people who want good deals—this is basically what all Americans want. But when a FSBO says they already have a Realtor but they have the ad online, trying to sell it themselves, it is very confusing to me. When advertising a house, you need adequate descriptions and pictures, not a 2 line ad without anything useful. You also need to have the ability to reach out to the largest audience to get the most views on your listing, where views will turn into offers. If a FSBO truly had a Realtor, or at least a good one, wouldn’t the FSBO be advised to list the home on the MLS where the house can be seen by 40,000 people around the state? That is the truth about the multiple listing service and that is something that is worth paying for. Being able to choose an awesome offer out of 10 other very good offers gives you a real quality buyer you can work with. Not choosing the right buyer can cost money and even serious deals, so getting as many buyers as possible is really the best way to go.

Equity Sales are Up

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According to the California Association of Realtors distressed sales report, “…equity sales – or non-distressed property sales – rose further in May, rising to 89.2 percent, up from 88.4 percent in April [2014].” I will first get into what it means to have an equity sale, then continue by comparing this market to previous ones.

An equity sale is quite simply the sale of the house where the seller receives money from the sale. Realtors are trained to estimate the net proceeds for the seller to provide an overview of the costs of selling a house.

In previous years, equity sales were not occurring as much as other sales, such as short sales and REOs, because sellers often were facing a depressed market where their loan value exceeded market value. When a seller decides to do a short sale, their net proceeds is often zero. Of course, not receiving net proceeds from sale is far better than owing somebody (i.e. the bank) money, which is why the short sale was so popular to begin with (i.e. it bestowed debt forgiveness to the seller).

So, what does this mean? This means that 9 out of 10 homes on the market, and viewed by buyers like you, are most likely transactions wherein the seller will receive money from the sale of the property. The seller getting money from the sale in no way affects the buyer’s purchase—the buyer does not pay more to purchase the house if the seller is making money on the house. Sometimes buyers ask how much the seller is making on the house, and to some extent the answer is obvious and finite to two possibilities:

(1)    The first possibility is that the seller is making net proceeds equal to the purchase price, less fees, less existing loans.

(2)    The second possibility is that the seller has net proceeds equal to the purchase price, less fees, assuming the seller owners the property free and clear.

Buyers are people, too, and they sometimes inquire about the seller’s gains. This is natural and if the answer is available, I will share an estimation with the buyer when it is appropriate.

Ethical consideration: If the seller is making money on the property as a flip, do I have an obligation to tell the buyer that the seller is making money on it? Legally, properties flipped within 90 days or less and transferred to a new buyer triggers a disclosure to the buyer that the property has been flipped. Beyond that, there is no legal disclosure required.

As a Realtor, we have access to public records that show us the last transfer date of the property, which means it is apparent to us if the property is a flip, even if the 90 days flip rule has passed and the seller does not disclose to the buyer that it is a flip.

As a fiduciary to the principal, I would disclose that the property transferred between individuals very recently, alluding to the possibility that it was a flip. I won’t get into it here, but the fact that a property is flipped means that we probably need to scrutinize the property on a stricter level in order to make sure the repairs were done correctly. By disclosing this to my client, it enhances my client’s perspective on the property and will make more rigorous the client’s investigation process.

Why We like Working with Savvy Real Estate Buyers and Sellers

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Some real estate agents are terrified by the thought that their clients have researched an area as much as they have. This puts real estate agents in less of a position of power and that is somewhat threatening, or so they say. However, my question is this: were agents ever in a position of power to begin with in the first place? The answer to this is ‘no’. Agents are fiduciaries for their clients, or principals, and it is an agent’s duty to represent the interests of the client in the highest regard. And buyers want to pay only as much as they need to to get the house, while sellers want as many offers as possible at the best price and terms. A Realtor gets the client in this position whether the client is savvy or not. But if the client is savvy, then we love it! Let us first discuss what it means to be a savvy client of real estate.

When buyers start their process on the internet, it’s no surprise that they view listings casually, or with a specific purpose in mind. Instead of streaming their favorite Netflix show (mine is Orange is the New Black, by the way), they may instead decide to go on real estate websites to see what the latest inventory is out there in their target market. Savvy real estate buyers and sellers already have a strong familiarity with their market from online data that is readily available for everyone to see.

Savvy real estate buyers and sellers often ask very detailed questions about the neighborhood and can go through large amounts of listings in a short period of time. This means the consumer is well-informed. And we find this to be a good thing. When a consumer is informed, it takes less time for us to convince a buyer or seller that they must offer or sell at a certain price. If a buyer wants to low-ball a property and we tell them there are 10 offers to the property, a savvy buyer will know to increase the price in order to get the offer accepted. Sellers wanting too high a price will know right away with our advice that the price might be too high, and we would do this by corroborating our opinion with the data the seller views for herself on other websites. I think when all parties are informed in this manner, decisions can be made more efficiently.

Some people think that to service a client, that the Realtor needs to be an order giver and the client an order taker, but this is not the case at all. As real estate agents, we are, legally, special agents with limited powers to bind the principal to contracts. In layman’s terms, this means that the client is 100% the decision maker in all aspects of real estate. So when we work with savvy buyers and sellers of real estate, and these clients of ours end up making the final decisions for themselves with our guidance, do you think we want them informed or not so informed? The former wins over the latter every time.

What if a client is a first time home buyer and does not know much of the real estate market? That is perfectly fine– it is our duty to fill in the gap and inform our clients to make the best decisions they can. After our preliminary advice to our clients, our clients’ understanding of the market improves, and over time, less needs to be explained to them (less explanation does not constitute less disclosing, please keep this very distinction in mind). Either way, we are always excited to help our wide range of clients, whether they be savvy or buying or selling for their first time. While Realtors are still the real estate experts, we recognize the thoughtfulness and knowledge our clients have picked up along the way and we think it’s great that our clients are doing their homework.