Joe Baker's Real Estate Blog

Greetings all:

Welcome to my new Blog and thanks for being a part of it!  I plan on updating this Blog on at least a weekly basis.  I will discuss of course the Real Estate Market.  I'll mix in some lending comments and also what the economy may be up to at that particular moment.

Well, as some of you might be curious about, we're going to talk about the new lending guidelines and why these guidelines have recently changed.  As I am sure that everyone has heard, 100% financing is now a thing of the past.  Well, almost.  It's a thing of the past unless you have DVA eligibility.  If you don't know what DVA is, please ask - but my hunch is that if you don't know what it is, you don't have it.  Some of you may be thinking that you could care less about 100% financing because you have enough money to put down on a home of your choice.  As you will no doubtedly see, even if you have 100% cash to purchase your home, YOU CARE THAT IT'S GONE!!!

Up until recently, there were a plethora of 100% financing options.  These ranged from 80/20 loans to loans with mortgage insurance to loans with down payment assistance.  The 80/20's went away when the housing market took a turn for the worst.  The lender in the second lien position (the 20% lender) was taking a hit because the homes were not selling enough to cover that amount.  Well, we don't care that they went away because there was still 100% financing through FHA using one of the down payment assistance programs such as Nehemiah.  This is a government backed loan that limits the lender's risk for defaults.  As consumers, we cared that 100% was there.  As a lender, they care about insured mortgages.  Hence, everyone was still happy.

Now, about 2 months ago, legislation was passed and signed into law that made 100% FHA loans (the only available at the time) that were using down payment assistance illegal.  The legislation contended that people that use down payment assistance were more likely to default, even though there is no concrete evidence for it.  Now the down payment that you need to come up with is 3%, soon to change to 3.5%. 

I'm starting to get to the point why everyone cares that down payment assistance is gone.  People need a place to live.  Nobody can argue with that.  Life changes drive Real Estate.  Whether it be a college grad that needs his or her first home, a growing family that needs a bigger home, or even a separation of a family into two different home.  Whatever the case may be, most people move up OR down in their home value 125-150%  As an example, the owner of the $200,000 home that wants to upgrade is probably going to spend between $250,000 and $300,000 on the new home.

Here's a stat for you that I've kept to myself up until now.  40% of buyers in our local market use down payment assistance for homes valued (and purchased) under $300,000. 40%!!!  Now, let's say you have the $800,000 home for sale that you would like to sell before you upgrade or downgrade.  I'd venture to say that you don't want to payments, even if you can afford it.  Let's also assume for arguments sake that everyone in my example here is going to upgrade.

1. Your $800,000 home is for sale.  You want something new, regardless of what it is.
2. The buyer for your home is selling $600,000.
3. The buyer for #2's home is selling $450,000.
4. The buyer for #3's home is selling $350,000.
5. The buyer for #4's home is selling $250,000.

THERE ARE NOW 40% LESS BUYERS FOR #5 BECAUSE DPA IS GONE!!  As you can see, everyone is affected up the line for home selling.

What can we do now?  Well, the short answer is we can sit and wait.  The Economy has tightened it's grasp on the credit market which may have some negative effects on the housing market.  As if the housing market needs anything more negative to happen to it, right?  Housing has consistently been a positive factor for the economy in the past many years.  Even though it is easy to see that people have over-mortgaged, most of them used that money to buy things - to consume things.  Restaurants flourished, home stores had profits soar, even down to the little mom and pop stores in the malls.  All had great years because of the consumption.  It's obvious that I am no expert on the economy.  However, I am an expert in the Real Estate Market.  No credit (lack of demand), depressed prices, and increasing inventory spell one thing.  Trouble!  I believe Macroeconomics 101 taught me this valuable lesson.

During my marketing presentation to an Owner, I of course talk about things that I do that may be different from what a lot of other agents do.  One of those items that I like to do for every Seller are multiple open houses.  I can't tell you how many times that Owner or Owners comment that they are unsure of whether or not they would like those pesky open houses.  After all, the Owner does have to leave their home for two hours on a Saturday or Sunday. 

I always like to ask why?

Here are my favorite three objections to an open houseand how I like to respond:

1.) Owner - "We don't want our nosy neighbors in our home."

Why Not?  Just because they are neighbors, that doesn't mean that we cannot enlist them to help sell this home.  We certainly know that they are not going to buy the home (Well, most likely).  However, all the neighbors have a circle of friendship that extends far beyond what we have.  What if they have a friend that is looking that may be interested?  That nosy neighbor could be the one to actually procure the buyer from our open house. 

2.) Owner - "No serious buyers come to open houses anyhow."

Although it is true that many open house lookers are just passer by-ers, some of the people that will come are actually responding to an ad that was placed.  Or they saw a sign for the open house and it's in the neighborhood that they have been keeping their eye on.  It's impossible to state unequivocally that all open house guests are just there because they have nothing better to do.

3.) Owner - "We don't want people in our home that we don't know."

MY FAVORITE!  Almost everyone that goes through their home with another agent at a regularly scheduled showing will be someone that the owners don't know.  Why not allow us to get all the people we possibly can into the home at once?  It's not very often that the eventual buyer of the home is a close friend, or even an acquaintance.  Strangers are good when it comes to the open house.

Sometimes Sellers don't think of what it takes to sell a home.  After all, it only takes one Buyer to buy the home.  The trick in this market is getting that one Buyer into the home in the first place.  In my opinion, it's always a good idea to get as many people through the home as possible.  As I alluded to before, the more people that come into the home, the more the word of mouth starts to spread.  That eventual Buyer may not even know they are going to be a buyer until they walk into the home.

I've had many calls lately about finding a buyer a home on either a contract for deed or a rent to own.  These calls are coming from people that just can't get a mortgage right now, or don't have the required funds for down payment per their credit.  I have been having the conversation about the positives and or negatives for each one so I figured I would write about it.

So let's first talk about a Rent To Own Situation.  Here are a couple of Positives a Rent To Own Home:

• You can work toward home ownership with this type of contract.
• You will typically get a credit each month for on time payments that you can use towards the purchase price.
• You will typically have less money out of pocket to sign the contract.
• If you make UNDER a certain amount for your income, you will get a renter's credit to be used on your taxes.
• You have a set purchase price that you know about from day 1.

Here are a couple of negatives for a Rent To Own Home:

• You don't actually own the home.  The rent to own contract is a glorified rental contract.
• If you default on any portion of the contract, you may lose the chance to buy the home for the agreed upon price.
• When you apply for a new mortgage, the lender will NOT recognize the Rent To Own Contract.
• You have a set purchase price that you know from day 1.

Now wait, I listed one items as both a positive and a negative above (see the comment in bold).  Well, it all depends on what the price is from day 1.  If the market appreciates more than anticipated, you might end up getting a better deal on the home.  However, if the market goes down, you may end up having to buy the home for an inflated price.  Not many normal buyers are willing to do this so you may just end up walking away with nothing to show for your efforts.

Here are some positives for Buying a home on a Contract for Deed:

• You actually own the home from Day 1.
• You get to write off your mortgage interest and closing costs, just as you would if you obtained a standard mortgage.
• You know what the purchase price is from day 1.
• When you come to your balloon (if you have a balloon payment set) the mortgage company will actually recognize the contract and acknowledge your amortization schedule.
• Depending how far out your balloon payment is (again, if you have one), the mortgage company will consider it a refinance.  This makes it much easier to obtain the mortgage.

Here are some negatives for Buying a home on a Contract for Deed:

• If you default on any portion of the contract, the Contract for Deed could be canceled in as little as 30 days.  You could potentially lose your down payment.
• The down payment that may be required could be a lot higher.

So, as you can see, there are positives and negatives to each method.  In my opinion, if you can get into a contract for deed as opposed to a rent to own (or even a rental) you will be much better in the end.  To answer a question that I'm sure is lingering - In my experience, I have worked with Buyers that had to put as little as 1.5% down to get into the contract.  On the flip side, there are some sellers who will not even consider selling on a contract for deed unless there is 20% down.  It all depends on how motivated the seller is, and how credit worthy they think you are!  Please contact me if you have any questions that I did not answer.