Why Price Isn’t Everything

Charlotte’s real estate market is nutty right now and with very little inventory on the market the chances of a home going into a multiple offers situation is exponentially higher. Especially in price points under 350k, where first time homebuyers are up against investors with deep pockets, all-cash offers, homes on the market only a day (if getting on-market at all) and general real estate debauchery.

Multiple offers. Highest and Best. What does it all really mean for the average homebuyer? Maybe not quite what you think. There’s a lot that goes into a seller selecting an offer from a pile of eager buyers, and it’s not just who offers the highest price (but yes, that’s important too).

Type of Financing

The type of financing that a buyer has can have vast implications when it comes to getting the transaction through to the closing table. FHA and VA loans are guaranteed by the government, but they also require more stringent approval processes. And because they are government-backed these processes can move slower and be more difficult to navigate. Down payment assistance programs can be another caveat within the process. A buyer would be silly not to take free money, but when that money comes with strings and stress for the seller, it might be best foregoing that money with our current market.

Buyer Liquidity aka money in the bank

Buyer liquidity is a natural extension of financing. Certain financing is geared towards helping buyers that don’t have much money to put down on a home. For example, there are VA loans that are 100% financed loans, so the buyer is bringing no money to closing. That’s great for the buyer, but what if the home doesn’t appraise up to the purchase price that’s written on the contract? The lender is only going to lend up to the appraisal price (aka what the home is “worth” in the eyes of the lender) so if the seller knows that the buyers aren’t bringing money for a down payment (or aren’t bringing much) then the likelihood is high that buyers won’t have cash to bring to cover the difference in the appraisal and purchase price. If this can’t get figured out in a timely manner then the buyer will have to terminate the contract.

Which brings us to…

Due Diligence and Earnest Money Deposits

If a buyer needs to terminate a contract the money that they have on the line is their Due Diligence money and potentially their Earnest Money. Whether or not they lose Earnest Money is dependent on when they terminate the contract (during or after the due diligence period) and certain types of financing require the buyer to receive their Earnest Money back if the home does not appraise for the purchase price (I’m talking about FHA and VA loans here).

If any of these termination scenarios were to occur, would the DD and EMD received from the buyer really be enough to compensate for the lost time and the seller having to go back to square one in selling their property? Riskier financing means more DD and EMD is needed to entice the seller to take a chance on the buyer.

Closing Date

Depending on the moving situation that the seller may be in, they may want to move very-very quickly and be done with the sale or they may want to stay in the house a few extra days or weeks to make the move-out process smoother. This can also lead in to the discussion of seller possession after closing. If, for example, the seller needs to sell their home to put money towards a new construction home they’re building they may need to close soon but then they don’t have a place to live until their home is completed and ready for move-in. A closing with seller possession after closing, also known as renting back a house after the sale, may be very-very important to the sellers. There are liability issues with the seller staying in a home they do not own for a period of time, so if this is something you’re interested in doing or offering, make sure you understand what could go wrong.

Buyer and Agent Requests

For the buyer this means other things that are requested as part of the contract. Usually it’s requesting the seller to pay a portion of the buyer’s closing costs, leaving personal property behind like a fridge, washer or dryer, or paying for a one-year home warranty for the buyer.

Requesting closing costs reduces the overall amount of money that the seller receives from the sale, and sellers don’t really like less money. Also, such a request tells the listing agent that the buyer is likely already strapped for cash because they need help paying their closing costs. It’s important to note that closing costs can’t really be financed as part of your loan amount, someone needs to pay them at the closing table. If those expenses are already tough for the buyer to cover are they really going to have money to cover an issue if the home doesn’t appraise? Likely not.

Another thing that goes into decision-making is how the buyer’s agent conducts themselves. I know, it doesn’t sound fair to be judged by someone else’s actions, but if that person is representing you and they aren’t conducting themselves in a professional manner then that’s a problem. If a seller receives two largely identical offers but one has a knowledgeable, communicative, and courteous agent and the other has a trainwreck of an agent, I have to tell the seller because it could impact the buyer’s ability to get things done in a timely and accurate manner, which could cause the buyer to need to terminate the sale.

Seller Preferences. Maybe.

This is where things turn into a grey area. It’s common practice these days for buyers to write personal letters to the sellers explaining why they love the house and why they should choose their offer over any other. Depending on the seller these may work, or they may backfire, so if you’re the buyer be careful! I had a client going through a messy divorce and they got a ton of letters explaining how the buyers saw themselves building their family with their spouse in the home. It was hard to read knowing the circumstances of the seller, who had also planned to grow their family in the home, but life ended up much different than they had expected.

I had another client who got their offer accepted because both the buyer and the seller were veterans. The seller felt so strongly about supporting a fellow veteran that they took a more-difficult VA loan as opposed to a conventional loan.

Seller preferences can get sticky if their preferences could appear to be a violation of fair housing laws. Choices based on the buyer’s race, gender, family status, etc. are highly discouraged by real estate professionals so we’ll try to keep these details out of the discussion if at all possible. When I talk to a seller about selecting an offer and personal details about the buyer are invovled in the submission I forewarn the seller than I will remove photos or information that could violate fair housing. If this is a problem for the seller then we have another issue entirely.

What could a year REALLY cost you?

Waiting a year for a lease to end or a promotion to be awarded can sound like a great thing when looking to buy your first home, but with  mortgage interest rates expecting to trend upward over the coming year, a small percentage increase could mean big money over the life of your loan.

When I talk about 1% interest it sounds tiny, but what if I told you that amounts to an additional 50,000 you’ll be paying to your lender if you’re gearing up to purchase a median priced home in Charlotte?

Now it sounds serious!

So here’s the scenario:

According to the Charlotte Regional Realtors Association, the median price of a home sold in Mecklenburg County was $250,000 during October 2018. Currently, mortgage interest rates are hovering around 5%, with increases expected in the next year. Based on these statistics and with the help of MortgageCalculator.org, here’s the math for what that actually means for someone buying a house today, and a the same house a year from now (of course I’m not taking into account price inflation… that’s a discussion for another post)

Here’s the math:

Today vs 1 Year

** This analysis is brought to you by MortgageCalculator.org and my super-sweet Microsoft Excel skills**

Assumptions: again, I assumed that the price of the home was the median price for Charlotte of 250k, and that the loan is a conventional, conforming loan (aka 3% down with PMI until the borrow has 20% equity in the home, at which point PMI goes away). I estimated property taxes, which were a bit high as compared to what I saw on recent sales in the MLS, but we’d rather be a bit conservative, right? Homeowners insurance for this example was a downright guess and is dependent on each home/homeowner/insurance company/etc.

What this means for you (even if you don’t like math): With all things being equal, a 1% increase in your mortgage interest rate could cause you to pay $152 more each month for the SAME HOUSE. And this $152 a month causes you to pay PMI for a longer period of time (because it takes longer to get to the required 20% equity in the home). On a yearly basis you’re paying an additional $1,825 for the SAME HOUSE. Over the entire 30 year life of your loan, this means you’re paying an additional $55,973 to your lender… why? because of a measly 1% increase in your mortgage rate.

 

Fed rate, T-bills and Mortgage rates… Oh My!!!

Around every water cooler in America we’ve all been discussing that the Federal Reserve has been steadily increasing rates from the historic lows we’ve seen for the past 10 years, and is currently hovering between 2 and 2.5% as of the writing of this post.

But what is the Federal Funds rate? (and honestly, why do I care?)

The Federal Funds Rate is the interest rate that banks extend short-term, overnight loans to eachother so that they meet minimum bank reserve requirements. As the Fed increases rates, banks must keep more funds on-hand at the bank or they must elect to pay more to borrow from another institution to meet these requirements. So, banks have to hold tighter to the money that they have. From a 10,000 foot perspective this restricts the overall availability of cash within the US economy and slows investment. This causes business to grow and hire workers more conservatively and keeps the US economy as a whole operating at a sustainable level. When the US economy weakens (i.e. high unemployment numbers, etc.) this process is reversed and Fed rates are decreased.

While the Fed rate does not have an immediate impact on things like mortgage interest rates, it does have an overarching impact on the economy, consumer and investor confidence, and investment decisions made based on the consumers’ and investors’ level of confidence.

A better indicator of mortgage rate changes is the treasury bill (T-bill rate) as investors compare all fixed-income investments against one another. In this comparison, T-bills are fixed income investments that are backed by the US government, meaning that their risk is very low, therefore, to be deemed as attractive to investors other fixed-income investments must offer a higher rate of return to counter-balance the additional risk that the investor must take on with things like mortgage-backed securities. Instead of being guaranteed by the US government these investments are supported by the value of the consumer home loans they contain. Relying on consumers to pay their mortgages and associated interest payments carries significantly more risk to an investor than the US government. Therefore, as treasury rates of return increase, the returns available to investors in mortgage-backed securities must also increase (i.e. mortgage interest paid by the consumer), otherwise these investors would switch into the less-risky government bonds.

While the Fed rate does not have a direct impact on mortgage rates for consumers, overall, an increase in the Fed rate and treasury bill rates of return cause pressure on consumer mortgage rates to keep the balance of risk and reward in the investment arena. So, without any signs of decreasing Fed rates, expect mortgage rates to continue to climb over the foreseeable future.