Tag: realestate

When You Don’t Have a Rich Uncle

Jumbo Loans

What you are about to read isn’t for everybody – that sounds sinister, right? – but you really should read all the way through because you’re going to want to be prepared when the appropriate situation presents itself.  We’re talking about Jumbo Loans . . . well, sort of.  We’re really talking about coming up with the down payment and how that becomes a slightly larger feat when the purchase price starts climbing northward.

We have a partner who is looking to help your clients either come up with enough money for a 20% down payment or increase your client’s down payment so they can purchase a larger house.  Let me break this down for you:

The limit for a conforming loan is $484,350 as of right now.  That means any home that has a purchase price of $605,438.75 or higher is where this partner of ours is helping your client.  (Here’s the math: $605,438.75 – 20% for the down payment = $484,351, which is the point where the loan steps out of “conforming” land and into “jumbo” land.)

This partner of ours is NOT a lender; they’re an investor.  In other words, they’re not loaning your client the money to help with the down payment; they’re becoming an investing partner with them who will share in EITHER the gain or the loss of the change in value of the home.  There’s NO interest being charged, and there’s NO monthly payment – as I said, it’s an investment.  Let me be clear right here: I am not trying to sell this to anyone; I’m simply presenting you with an option that could be that extra help your client needs to purchase that dream home.

In broad strokes, here’s how it works:  they will invest between 5-10% to be coupled with your client’s down payment to total at least a 20% down payment on a home.  This could mean that your client brings 10% to the table, and they contribute 10%, so your client can buy that $750,000 home.  Or, let’s say your client has $150,000 for the down payment already, but the home your client REALLY wants is $815,000.  Our partner could come in with the additional money needed, and your client’s monthly payment for the $815,000 home would be the same as the $750,000 home.  In many cases, that extra 10% they can bring to the table is the difference between a great home in a great neighborhood and THE home in THE neighborhood.

Now, here’s how the investing partner makes their money in Jumbo Loans – they’re not doing this for their health remember:  The home your client purchased for $750,000 you’re now selling for $850,000 ten years later.  The mortgage balance is $470,000, which means your client has $380,000 in proceeds.  The investor gets their initial investment of $75,000 plus 35% of the change in value of the home.  In this case, the home increased in value by $100,000, so 35% of that is $35,000.  All told, the investor gets $110,000 ($75,000 + $35,000) out of the proceeds of the sale.

Remember how I said they’ll share in your client’s gain OR loss?  Different scenario:  your client purchased the home for $750,000 with 10% down from their pocket and a 10% investment from these guys.  Five years later, your client needs to sell the house at a loss – it’ll only sell for $650,000.  The investor’s initial investment of $75,000 was for a 35% share of the “change in value”.  In this case, the change is $100,000 (in the negative), so they’re going to take a $35,000 loss against their $75,000 investment.  In other words, your client would only owe them $40,000.  If the negative change in value were more than $215,000, your client wouldn’t owe them anything ($215,000 X 35% = $75,250 > $75,000 – anything beyond the investor’s initial investment cannot be recovered).

There are other details in the agreement that range from time periods to fees, but I won’t bore you with those at this point.  If this is something you can see helping your client get into THAT home, I’ll be more than happy to sit down with you and your client and go over ALL the details so everyone’s fully informed.

In addition to this helping you with existing clients who are currently frustrated because they need that little extra something, this could help you start a new marketing campaign to find more of those clients who just need that little extra to help them get into the home of their dreams.  Also, you could use this tool as a way to attract more listings in these higher price points because you have a way to help them attract more qualified buyers.  Call me.  We can sit down and brainstorm other ideas where this could help with Jumbo Loans.  Get me a 44-oz Coke, and I’ll be ready.

Pretty Soon Now, They’re Gonna Get Older

First Time Homebuyers

First Time Homebuyers. Without any apology, I fully admit that this and the last few blog entries have been lifted from previous entries.  You might think this is the result of a recent streak of laziness, but I can assure you that I’ve always had a certain degree of . . . well, I wouldn’t call it laziness, but it’s certainly a penchant for finding the least complicated way of accomplishing something.  Most importantly, though, don’t fault me for dispensing timeless but relevant wisdom.

Speaking of wisdom, someone much wiser than I – which, let’s be honest, is a fairly large group of First Time Homebuyers that might have trouble finding a meeting space big enough to get together – once shared this little nugget with me: “Seek first to understand, then to be understood.”  As mortgage and real estate professionals, we’re required to take a gazillion hours of classes and then take a crazy confusing test JUST to get our licenses, so it’s natural to THINK we know a lot right out of the gate and that the world is just waiting for us to share it with them – and that feeling of being omniscient only grows over time.  (I’ll pause here if that last sentence made you laugh and caused you to shoot milk or another beverage through your nose and onto your keyboard.)

The cold hard truth, really, is that someone with absolutely no experience in our industry could run circles around a 20-year veteran if she follows my friend’s advice, and the veteran relies solely on his expertise.  Paperwork, forms, negotiation, the art of the deal:  all of these things can be learned along the way (and fine-tuned and improved, of course, over time), but understanding the client, her needs, her goals, and her viewpoint HAS TO take place BEFORE anything gets accomplished. Failing to do so or expecting to learn it along the way will only lengthen the process far more than necessary and waste a lot of time.

With that said, I have to make a confession: until I read a recent article from NerdWallet, an online financial consulting company, I thought Millennials (as a home-buying group) were just a bunch of whiners living in their parents’ basement waiting for an inheritance.  Obviously, I didn’t seek to understand; I just thought everyone understood and shared my viewpoint.

For the sake of reference, Millennials are those folks who were born between 1981 and 1997: 22-38-year-olds.  Here are some of the items the smart ones over at NerdWallet shared in their article that caused me to look at this group of 66 million people a little differently:

  • The median age for first time homebuyers in 2015 was 31 years old as compared to 30.6 in 1970-74
  • Two-thirds of these folks haven’t even reached that homebuying age of 31, and 22% are under 25
  • Millennials are renting for a median of six years before buying as compared to five years in 1980
  • Millennials are expected to form 20 million new households by 2025

Also, to add further to my understanding, Fannie Mae conducted a survey among Millennials and found that more than a majority had a positive outlook about purchasing a home; two-thirds of the respondents felt it was a good time to buy even after the housing market collapse. Looks like these young folks DO want to purchase a home!

Lastly, Fannie Mae’s survey found that one of the biggest factors keeping Millennials from buying a home is perception, not reality. When the surveyors dug into the answers like “renting is a more affordable option” and “cannot obtain a mortgage”, they found that these answers were largely based on the belief that a 20% down payment is required and a 750+ credit score is the low bar.  (Some of you may be shooting milk through your nose again.  I’ll wait.)  Reality is more like 3-5% and a credit score of 600+, generally speaking.

There’s a giant wave of Millennials coming, and they obviously need to be educated.  Are you ready?  If you want to make yourself even more invaluable to this huge bloc of future homebuyers, offer to teach them how to drive a car with a clutch.

Shiny Objects Can Be Pretty . . . Expensive

Buying an Existing Home

Buying an Existing Home. A few years back, Trulia determined that new homes cost roughly 20% more than similar existing homes (by the way, the same study probably concluded that the sky is blue and that water is wet, but that’s another discussion for another day).  Regardless of the somewhat obvious nature of Trulia’s findings, here are some other things to share with buyers – especially first-time buyers – and they probably all fall under the heading of “Duh, I already knew that, genius!”:

Disadvantages to Buying a New Home
•More expensive than buying used
•Location probably isn’t ideal (new homes are usually farther out from downtown)
•Despite being new, workmanship might be questionable
•Could be subject to costly HOAs
•Neighborhood dynamic is unknown
•Property values might be more volatile
•Construction nearby (eyesore and noisy)
•More cookie-cutter, less unique

Advantages to Buying an Existing Home
•Possibly cheaper
•Better, more central location
•Can buy in an established school district
•Can own in a more reputable and recognized neighborhood
•Old house might have new upgrades
•You can always renovate if need be
•Older houses tend to have more character, custom design
•Could actually be built better than a new home

Most buyers, I’m sure, would be surprised to hear you giving them the advice to spend LESS money on a home – and that should give you even more credibility.

Please see our First time home buyer guide

What You Lose When Saving

What you lose when saving

This is taken from an edition of Priority Pulse that I wrote almost four years ago.  You may think I’m doing this because I’m lazy or I spent the weekend doing something other than think about what to write for this week’s edition – and you’d be right on both counts – but this is something that needs to be repeated.  In fact, it’s something that we (real estate agents and mortgage folks alike) should be screaming from the rooftops. Let’s talk What You Lose When Saving.

Buckle up and get ready to have your mind blown! Okay, it’s not THAT mind blowing – some of you might even say, “well, duh” – but it’s still interesting.

The New York Federal Reserve’s economists recently published the results of a study: changes in down payment requirements have MORE influence over home buyers’ willingness to buy than changes in rates.

Surveying both buyers and renters, the Fed found that the effect of interest rates may be overrated when compared to even small changes in down payment requirements. The study found:

• Dropping the down payment from 20% to 5% increases the willingness to purchase, on average, by 15% among buyers and 40% among renters
• Decreasing the interest rate on a 30-year fixed-rate loan only raised the willingness to purchase by 5%, on average

Here’s what we should be putting in front of those folks who are sitting of the fence.  Right now, rates for an FHA loan are almost 1% lower than a conventional loan.  Even with mortgage insurance, waiting to save a 20% down payment as opposed to 3.5% will cost a buyer A GREAT DEAL.   Take a look at the numbers for a house with the purchase price of $200,000 with a 30-year fixed mortgage:

WAIT

$40,000 down payment
Total Loan Amt: $160,000
Interest Rate: 4.875%
Monthly Mortgage (P&I): $858.91

versus

BUY NOW

$7,000 down payment (3.5%)
Total Loan Amt: $193,000
Interest Rate: 3.875%
Monthly Mortgage (P&I) + Mortgage Insurance: $1059.03

No doubt $858.91 is better than $1059.03 for a monthly payment – that’s not what’s at stake here. The difference between those two payments is $200.12. In order for a person to save the additional $33,000 to go from a 3.5% down payment to a 20% down payment at the rate of $200.12/month, it would take just under 165 months – 13.75 years! – to get to that point, which is almost half the life of a 30-year mortgage.

For many prospective buyers, that additional $200 is significant, no doubt.  I’m not in favor of pressuring these folks into doing something that makes them feel uncomfortable, even if I think it’s in their best interest.  However, I would add this: in 13.75 years, where do you think interest rates will be for a 30-year mortgage, and will the type of house you want to buy still only cost $200,000?  Food for thought to have a better understanding on What You Lose When Saving.

For any more information or direction on this subject get in contact with Priority Lending LLC today.

Reminding an Old Dog of Old Tricks

This will be a short entry for this week, I promise.  Short or not, I believe it’s a good reminder for all of us in the real estate world about asking the right questions.

Recently, an agent asked me if we did hard-money loans.  “Of course,” was my response.  She gave me a quick sketch of what her client was looking to do and why he was looking for a hard money solution.  For those of you who are playing at home, if you guessed “fix and flip”, you’d be right.  Gold star on your forehead!

She explained that he was being quoted interest rates in the low teens, which is certainly nothing out of the ordinary for a hard-money loan, and she asked if we had something that would be better.  I asked her to give me the evening to look into a couple of things, and I told her that I would call her and her client back the next day.

That same evening, I was lying in bed when an awesome idea came to me.  Unfortunately, no one was around so I had to give myself a high five.  At any rate, I went to bed that night thinking I was the cat’s meow (don’t tell my dog I said that).

The next day, I reach out to the agent and her client with my wonderful plan.  It would be a straightforward 30-year fixed mortgage with interest rates in the mid 5s.  Since this was a fix-and-flip project, the down payment requirement was 20%.  When they heard that the interest rate would be in the mid 5s, the agent and her client danced a little jig (I’m picturing it now), but when they heard 20%, they stopped and asked if there was anything we could do to take that down to 10%.

My mind started buzzing to see what possibilities existed, and as I was coming up with a couple of things, the agent said, “That’s great!  Can we close on (insert a date in the V ERY NEAR future)?”  I was about to launch into an explanation of the process involved with this type of loan and how some of the factors, time wise, are out of our control, etc., and that will make closing in that short of a period of time doubtful.  I stopped myself and asked, “Is that date the lynchpin in all of this?”  They both confirmed that it was, and we began discussing other hard-money options.

In the end, everything was fine, but this exchange reminded me of one of the most fundamental truths in business: ask the right question so you can give the right answer; don’t ask questions to match the answer you think they need.  Lesson learned (or re-learned).