Come to the Dark Side, It’s Fun!

You may be saying to yourself, as you begin to read this week’s installment of possibly the best mortgage newsletter in the world if not the universe, that this better not be about how we’re in a seller’s market and that I need to be “armed and ready” to fight tooth and nail (now THAT is a weird saying) for the house I want when it hits the market. Relax. I promise I’m not going to write about that . . . because if you didn’t listen to me in previous weeks, you’re already behind the eight ball, and you need some other wise advice. I’ve got your back, don’t worry.

A bunch of people with pointy heads bulging with bigger brains than mine got together in a Holiday Inn conference room in Des Moines recently, and the leader in a tweed jacket with leather elbow patches, an old walnut pipe jauntily hanging from the side of his mouth, said, “Ok, people, no one leaves this room until we come up with a method to classify homes for sale in this ever-competitive seller’s market. I mean it!” Four feverish and stressful days later, with only 5-minute potty breaks and sleeping in two-hour shifts, they had worn out seven dry-erase boards and countless markers, but their hard work paid off: they had the perfect four-level classification system that would succinctly and effectively describe the conditions of the homes for sale. Buckle up, kids, this is groundbreaking stuff!

First the methodology – its simplicity is the key to its genius. They broke the homes up into four groups with each group representing 25% of the inventory – wow! Then – and this is where you might want to wear a helmet because your mind is about to be blown, and you’re going to want to contain the pieces – they gave a name to each of the four groups: Great, Good, OK, and Bad. If you’re having trouble processing this, let me help. The “Great” homes sell the fastest and get the best pricing when they sell; the “Good” homes sell almost as fast, and they have good, healthy pricing when they sell; the “OK” homes sit a little longer on the market and may have to take a hit here and there on price to get themselves sold; and the “Bad” homes have been sitting on the market for quite a long time either because it’s an owner/agent who thinks his house is the Taj Mahal and is worth $100K more than comps would support or the home is in a state of disrepair that disables it from a mortgage company lending on it and the owner doesn’t have the cash to fix and bring it up to a “loanable” qualification. If you want me to wait a moment while you read back through all that technical jargon, take your time.

So, here’s the deal: the inventory is vanishing almost as fast as it’s appearing (I’m preaching to the choir here, I know), so that’s all the “Great” and the “Good” and most of the “OK”, right? So, now you’re dealing with the “Bads” – the Dark Side. Since you’re not a bank with oodles of cash lying around, you’re going to need a mortgage to complete the transaction, so what do you do? I have the answer for you with one word: holdback. Quite simply, the money needed for the repair (roof, flooring, etc.) is held back from the proceeds of the closing, held by the escrow company, and paid out to the contractor once the work is completed. This allows the transaction to close and get everyone proceeding with their lives. More importantly, it gives you a tremendous tool with which to negotiate on the price!

Here’s a secret: going through the mortgage process with a holdback involved is something most mortgage companies hate doing. There’s extra work involved and a lot more hoops for the mortgage company to jump through with underwriting and other departments – it’s not a walk in the park – so many mortgage companies either act like they didn’t hear you when you ask about a holdback or they run screaming into the night and hide. Now, here’s the reason I tell you that secret: we love to do holdbacks! Why? We want you to arm you and enable you to dominate in this seller’s market without having to fight tooth and nail – that still sounds weird.