Tuesday, January 31, 2006

Plenty of Programs for First Timers, Cash Poor

With the cooling of the housing market, first-time buyers need to be assertive in elbowing their way up front of the home-buying line -- now. The cooling, or normalizing, doesn't mean the market is tanking. It means just what it says -- it's going to be more normal. Housing will continue to appreciate, sellers will continue to sell and buyers will continue to buy. The question is whether buyers will take advantage of this leveling off and get a good deal while the sellers are forced to give up a few things.
One of the items that was sidelined during the searing market the past few years, was the very commonsense financing offered through various government and private agencies to help first-time and cash-poor buyers get into the home market.
The National Association of Realtors released its annual Buyer Survey a couple weeks ago, revealing several interesting points. Namely, 40 percent of all buyers are first-timers, of those, 43 percent used no-money down financing. In addition, the use of the internet for all buyers has crept up to 77 percent and there's no reason that trend will falter. Interestingly, an old fashioned tool for agents, the open house, was the second largest used tool by buyers to look at houses, standing at 71 percent of all buyers.
Search "first-time homebuyer" on the internet and you'll have a mere 12.4 million web pages pop up. Let me narrow it down for you so you can find the financing of choice for home buying in today's market.
The U.S. Department of Housing and Urban Development is a great first stop. The HUD programs are a lot more forgiving of credit issues than most of the conventional programs on the market. In addition, the site is loaded with plenty of information on how to get access to the financing the organization insures. Keep in mind, a HUD loan only means a mortgage program is "insured" by HUD, not funded by HUD.
Both Fannie Mae and Freddie Mac are fabulous resources for first-time buyers. These two companies provide the largest source of funding for all mortgages across the country. I refer you to them, rather than an individual mortgage broker site, because they provide the most non-biased information about the programs they offer. Nevertheless, don't overlook mortgage company sites who take the Fannie Mae and Freddie Mac programs and may create hybrid loans out of these programs to make them even more favorable to the first-timer.
The National Council of State Housing Agencies (NCSHA) is a nonprofit organization founded more than 30 years ago by the country's state housing agencies to "coordinate and leverage their federal advocacy efforts for affordable housing," according to the group's site. The benefit to buyers on this site is its' directory of state housing agencies across the country, including every state, the District of Columbia, Puerto Rico, and the Virgin Islands. The agencies monitor, lobby for and administer the disbursement of monies from federal programs that provide lower interest rates for consumers, along with several other benefits to first-time and low-income buyers. With a leveling off on the market, buyers should reacquaint themselves with these very stable programs.
Finally, here are some tips for the first-time buyer as you look to find financing for your home.
While all the above websites can be very helpful in educating yourself, find a mortgage professional you can meet face to face. When you step into the process, it's best to have an experienced professional who you can call and meet with at any time. Get a referral from friends, family, co-workers or your agent as they all probably know someone who can get you through the process.
Act sooner than later on applying for your loan. As of today, the interest rates are lingering around 6 percent. All the mortgage rate watchers (i.e., economists) are predicting a rise in the mortgage rate upwards to 6.75 or 7 percent by the end of this year. Delay much longer and you may lose buying power just by waiting. Your monthly payment will stay the same, but your house price may drop because of an increase in the interest rate.
Look at hybrid loans to help keep your monthly costs down. A hybrid is a program that combines two or more programs to eliminate mortgage insurance premiums -- which can be very expensive each month and cut into your buying power. Ask your mortgage professional about this product.
Look around for help with the down payment. Some agencies have down payment mortgage. You could get help from family. Don't forget you could even sell some items in your house that could give you more money for the down payment. Could you sell the car (the one with the payment) and buy one with cash? That debt relief alone could get you into your home a lot easier than any other move.
Finally, research, research, research, but don't get frozen into inaction. At some point you need to dive in and see if the home-buying water is fine for your. Best of luck.
Published: January 27, 2006

Agent, Vendor Relationship Pretty Tight

Peeking at an online real estate discussion group, the question came up (and I've heard it before), is it bad to take a referral for my mortgage broker from a real estate agent? The quick answer is – no problem.
When it comes to the real estate industry in a local area, it's a pretty small community. Agents, lenders, various inspectors, insurance professionals and home warranty providers all know each other -- very well, I might add. Keep in mind that in between the seven years you purchased your last house (the average time that passes between home purchases), they have worked together on dozens, if not scores of more transactions.
Heck, the vendors probably even sponsored the agents' Christmas party or went to their kids' soccer games. So, yes, they know each other, probably even like each other -- just like you know and like the vendors who work with you in your business. And if you didn't get to know your vendors and you found out you didn't like them, would you want to do business with them?
A recent industry survey revealed that 42 percent of all buyers already knew their agent before they used them. That's a good thing. Building relationships, builds business. That's one of the first business-building principles in any sales endeavor. Just like you chose your agent because you or someone you knew trusts them, most agents select their ancillary service providers in the same way.
So here are five reasons why an agent likes to encircle him or herself with loan officers, insurance providers, inspectors, etc., that they know and use over and over again:
They like to use people they know. Familiarity is a good thing. If they know who they're working with, they are confident they can approach the vendor with problems in the transaction.
Agents can hold them accountable. If the home inspector doesn't find an item that was obviously defective, the agent will not be shy to approach that inspector and file a complaint, peg them at their next meeting, go to their boss, whatever it takes to get it solved. (This is, of course, assuming you have a direct, assertive agent working for you.)
Using the same people gets a business rhythm going. When you've worked with the same fix-it guy, you know his style, his timing, his professionalism. You know that if he hasn't returned the call in a couple hours, that he DID get the call from you and that he WILL call you soon. You know the mortgage guy/gal is going to be upfront with you and with your clients -- but most importantly, get the job done.
Business is referrals and referrals is business. These residual service providers are part of the Realtors' referral network. While federal laws prevent agents from receiving gifts of monetary value from these providers for their referrals, the referral is still legal -- and encouraged and sought after. In real estate, the referral is the most secure transaction than any other lead. By working with a tight circle of professional service providers, the agent will receive referrals and feel comfortable sending out referrals to this network.
Friends like to work with friends. Hopefully, your agent isn't letting friendship cloud his or her judgment in referring business out, however, it's pretty common in all industries that friends like to work with their friends. If my clients and customers are going to need services, I'm going to refer them to someone who is good at what they do and who, hopefully, is a nice person. I've never heard a referral like this: "He's a good loan officer, but I can't stand him. Here, use him."
Most agents and mortgage brokers who refer business to each other, actually like each other. The main reason I find they like each other is because they bend over backwards to get the job done.
Published: January 20, 2006

Negotiating Points Sells Houses, Benefits All

When I'm looking to sell a property, the first thing I have to look at is my "BATNA," or Best Alternative To a Negotiated Agreement. This is the question a good agent should be putting forward to both buyers and sellers.
"If we can't sell this house at your asking price, what are your steps you're willing to take?" The same can be asked of a buyer. The bottom line rests with what the buyer/seller wants -- the house or the best terms. Keep in mind – the ultimate goal is to get a house.
This is something I've had to remind sellers when they were in the heat of negotiating one point in a counter-counter-offer. We've agreed that we want to sell to a particular buyer, but this buyer has asked just for a little too much -- about $1,000 more than the seller wants to let go.
In the big scheme of things, frankly, $1,000 is not that big of a deal. We're talking about a $400,000 house and the buyer and seller are quibbling over a thousand bucks. Seems trite, but this is where the skillful negotiator can help buyers or sellers remember the real goal is not to "win" $1,000, but to "win" the house.
By the time the buyer and seller get to this point, my advice to both is to focus on the real goal -- getting into or getting rid of the house. If I'm moving to a new job in Chicago, and my house has been on the market for 100-plus days and I have a contract on the table -- believe me -- it's not going away till I have a settlement day on my calendar. This is where both buyers and sellers fail.
Instead of engaging in the negotiation process, they just give up. "Well, if they want that much money from me, then they're just greedy and I'm not going to sell to (buy from) them."
These are the saddest words in the selling/negotiating process. We're starting out at $400,000, the offer comes in at $380,000, we've negotiated up to $389,000 and the buyer has gotten $10,000 in assistance, but wants to hang on to the home inspection items (which will cost $1,000) or they're walking. (Vice versa, the seller won't give $1,000 more to get the deal done.)
Now, how do you handle this? The first thing for both sides is to remember -- in this example, we're talking just over a quarter of one percent of the asking price ($1,000/$389,000 = .00257). So you have to ask whichever party is threatening to walk to first sit down for a second and ask themselves a few questions about the $1,000 (or whatever the amount is):
Do I have the money? If you just simply don't have the money, then it's possibly a break point. There's a bit of suspect in the negotiation price to start with and when a buyer says, "We just don't have any more money to put into the transaction," it's now up to the seller to take that into consideration and either believe it or disbelieve it. However, if the buyer doesn't have the extra grand, then they may not be able to even qualify to buy the house. On the other hand, the seller may be in the same situation, "I have to have that extra $1,000 to make it work on the next transaction."
Many times, give and take is required for both parties to get what they want. Ask: "Is it that you want another $1,000 from this guy or do you want to buy (sell) this house?" What's the real goal here?
Focus on the value. To the buyer, you have to ask, "If you don't get this property, are you going to hate yourself later?" If they quickly say "no," then walk. If the answer is, "Well, I may not hate myself, but I really like the house." Then get over it and do what it takes to get into the house.
For the seller, the question is: "Are you willing to wait another 60 days to sell your house and possibly lower your price (again)?" Keep in mind, when you talk about lowering prices, it's not in the $1,000 range, it's more like $5,000, $10,000 or $20,000, depending on the price range of the property. In the million-dollar home market, it's not unusual to drop by $100,000 at a time.
Thus both buyers and sellers have to think about what will happen in the future if they don't go for the negotiation now. In a market moving up, the buyer should remember the next property is probably going to cost more than the one they are negotiating on right now. In a dropping market, the seller has to take into account the price drop and then the negotiations with the next buyer. The $1,000 may turn into $6,000 or more with a price drop and new negotiations in the future.

Monday, January 09, 2006

Rebates: Consumer benefit or agent pay cut?

One of the latest consumer-oriented real estate benefits getting press these days is the commission rebate to buyers. In essence, a buyer purchases a house and receives a 1 percent (or some derivative of the sales price) rebate back at settlement. On a $215,000 house (national average) that's $2,150 back to the buyer.
The debate goes something like this -- if the average commission is 6 percent and the average house is $215,000, then what's wrong with consumers getting a piece of the action as a rebate? Some states don't allow it, contending that the only people to benefit from the real estate business are licensed real estate agents -- not consumers.
As you can imagine, this practice has caused a lot of debate among practitioners. In states where rebates are allowed, it causes many agents to ante up to buyers who want to work with agents that will hand over part of their compensation. Meanwhile, agents who believe they should keep what they earn of the commission contend it's an unfair advantage for those who cut their fees in this manner.
A challenge agents have in debating this practice in an open forum is that federal law prohibits agents discussing commissions with each other (unless they work for the same company), without violating the RICO anti-trust legislation.
The January 2006 issue of Realtor Magazine documents the latest moves in states regarding the rebate debate. Depending on the state, agents "may be prohibited from or limited in the offers they can make to consumers, finds a new study from the Worldwide Employee Relocation Council Coalition and the Association of Real Estate License Law Officials."
Furthermore, "Fee Splitting, Rebates, and Other Incentives found that while most state statutes don't specifically prohibit fee splitting with principals in a transaction, wording designed to forbid sharing fees with anyone who doesn't hold a real estate license often keeps licensees in some states from offering fee rebates to consumers," according to the article.
When you consider that the commission standing alone does sound like a lot of money, why wouldn't it be in the consumer's best interest to get back a rebate? Especially when high-priced markets such as Washington, D.C., Los Angeles, New York, etc., are taken into account, the commission seems huge where the average sales price lingers more around the $500,000 mark. At 6 percent, that's $30,000.
It is a lot -- until you start divvying it up between the companies and their agents. First you have to split it in two -- half to the listing company, half to the selling company -- so the gross commission per company is now $15,000. Then the agent has to split that with the company. At 50 percent, the agent makes $7,500 on the transaction. If the consumer takes a third off the top (1 percent), then the agent makes $4,950 per transaction.
Agents face stiff competition from their colleagues. In Northern Virginia, for instance, the region has about 15,000 agents chasing a $20 billion market. Sounds like a lot -- but if each agent sold an equal share -- it would be only $1.3 million in sales, resulting in about $20,000 in income. You can see why full time agents get frustrated when a consumer wants part of their income with those odds against them.
Agents I've talked to are especially miffed that no other industry is constantly looked upon as being over paid and the consumer wanting something back from the service provider. In addition, they point out they only get paid if they are successful -- there's no commission for the unsold house or the rejected contract. (Lawyers get paid whether their case wins or loses, just as doctors get paid whether the patient lives or dies.)
Tips for consumers: Discuss your agent's fee and what services you're going to receive in exchange for the money you pay. Is it of value to you? There are various ways to get cash back in the transaction -- not just the commission. Be sure to find an agent who is good at negotiating. In a normal to soft market, sellers are very willing to offer up cash assistance to the buyer. Many loan programs allow up to 3 percent assistance from seller subsidies. Be sure you have an agent who knows how to negotiate on your behalf.
NOTE: States prohibiting rebates to unlicensed individuals:
Alaska, Kentucky, Louisiana, Mississippi, Missouri, New Jersey, North Dakota, Oklahoma, Oregon, South Carolina, Tennessee, West Virginia

Some Owners Don't Understand "Presentation"

I went out with some friends this week to look at some houses. They're moving up from a condo to a single-family home and they're very excited. As we caravanned from home to home, it was obviously clear that some owners in this market sincerely believe they can offer up a can of worms as caviar.
During a real estate course I took years ago, the trainer used a fantastic example of how human nature dictates the selection process. She produced two $1 bills. One was fresh from the bank. You almost had to check to make sure you didn't have a second one pasted to the back it was so new. The second bill looked as if it had been gone through Desert Storm, been laundered several times and was nearly disintegrated.
She went to someone in the front row and asked, "Which one do you want?" The obvious answer was the clean, crisp, freshly printed bill. Why? The value of both was the same. They both are legal tender in any American retail outlet around the country and several countries around the world. But -- the clean one always got selected.
Thus, when we walked into a $370,000 single-family home and found mounds of clothing in the living room, left over dishes on the table along with opened cans of soup and pots with soup in them on the stove -- the luster of the home on the market dulled quickly. Interestingly, this was not an anomaly in the marketplace.
Another home priced at $449,000 was in about the same condition. The Realtor had not called the homeowners to let them know my friends were coming by; the for sale sign had dropped into the grass; there was no flier about the property inside the house; the bathrooms were scum covered; no staging of the home had been carried out whatsoever. There was even a bottle of beer strategically placed on the floor, next to the closet in the master bedroom. We were amazed. The lots were a quarter acre or less on both homes. How could they demand the money they were asking and not prepare the home for sale?
Then there were the properties my friends put on their A list -- clean and new looking inside; new or near new appliances; cleaned by either a very astute owner or cleaning company; home warranty included in the asking price; plenty of bonus add-ons, such as bonus room, media room, large lot (half acre). All in the same price as the above two properties.
The requirements to get top dollar have and always will be the same:
Clean the house. Thoroughly -- before you put it on the market. If it's not clean, don't even consider putting it on the market. You will lose a contract just because of dust and scum.
Paint the interior. Paint is cheap, but cleans up any dwelling place.
Declutter. Get rid of everything you don't need to live on a day-by-day basis. You don't need your seasonal decorations. The kids can do without half their toys. You can probably live without a third of your furniture. Get it into storage or a friend's house. Space adds value.
Have handouts. With more properties on the market, you need to make sure your house is memorable -- with a good marketing plan that includes a flier the buyers can take with them.
Price right. Look at all the parameters of your house, not just the bedroom and bath count. One of the houses above is sitting on a half-acre lot with a 1-car garage and built in the same year as it's counterpart listed for about the same mount of money, but which has only half as much land and no garage -- not even a carport -- but they're in the same area. (This is mostly the Realtor's job, but a stubborn seller may cause an over-priced listing.)
When placing your house on the market, keep in mind it's more involved and requires more work than selling a used car. We're not talking a difference of a couple hundred dollars on price here. Missing the mark on price and condition could cost you tens of thousands of dollars.

Statistical Analysis Eases Bubble Talk, Shows Rents Growing

There's been plenty of press lately on softening markets around the country and now there are more articles finding ink about how the real estate bubble isn't really a bubble, hasn't burst and is more likely just seeping out some air.
I've had a Google News Alert established for months now on "real estate bubble." It's amazing how many local newspapers keep reporting about the bubble – somewhere else. Not in Florida, Texas, North Carolina., etc., but somewhere else – those poor people.
Then today's search results brought in these headlines:
"Proof that the real estate bubble hasn't burst"
"A challenge to real estate bubble reports"
"The real-estate bubble media coverage bubble"
"Bye-bye bubble"
"Self-correction of real estate bubble"
In reading the articles they all seem to be saying, "Um … wait a minute, we may have overreacted to the bubble stories and now it's not a story."
Through deeper reading, you'll find industry watchers and insiders have come out with the big guns in the area of statistical analysis. Without statistics, business people don't move forward and these stats have been showing that in many places across the country, there are some very strong markets taking a breather, but by no means has any bubble popped.
The National Association of Realtors is even predicting a record year for 2006. Now, you might say, "Well, of course they're saying that to quell the fears that people's home values are in jeopardy." Maybe yes, maybe no. The problem for all the bubble prognosticators, however, is that markets across the country are still strong. Rarely do you find a market absolutely diving and people heading for the hills. The "softening" is more like a return to a normal market, not a bursting of a market.
In light of the fact that the Washington, D.C. region has the strongest economy and job growth in the country, I was surprised at the latest breather in the market. However, in looking over our own real estate stats, I've discovered that investors should be raising rents right now if they want to take advantage of a run on the rentals the last four months.
Investors inside any hot market need to look over the stats just as much as those who are selling. They must keep up with the real estate values so they know when to sell and move money to other investments. And they especially need to watch average rents as they don't want to get left behind in the growth of their monthly cashflow.
What's happening here is probably doing the same in other markets where sales are either headed downward or taking a breather -- rental inventory is being eaten up, rents are on the rise and days on the market have been slashed. At least for the last few months, it's turning in favor of the landlords.
According to the rental stats from the region's MLS, Metropolitan Regional Information Systems, Inc., in the District of Columbia, the average days on the market for rentals has dropped below three weeks. The average days on market last year at this time was more than 10 weeks. In addition, the average unit rented last month is bringing in $840 more annual income than the average unit rented a year before. Wealth-building is on the march.
In neighboring jurisdictions around D.C., the same is happening -- Montgomery County, Md., days on market dropped less than half to 30 days. Fairfax County, Virginia's days on market has dropped to just 23 from 59 in a November to November comparison from this year to last. Meanwhile, the average unit annual income is up by more than $1,000 compared to a year ago in Fairfax. Montgomery County investors are bringing in nearly $100 more per month last month than they were able to fetch a year before -- that's $1,200 per year increase in revenue.
I've always been a 'buy 'em and hold 'em" kind of investor. And other investors who have done the same are now smiling. The wise wealth building goes something like this -- buy low, hold and rent out (for years), sell and roll money to a larger property. This is what we refer to in the business as a commonsense approach to building wealth. Yes, those investors who purchased when there wasn't a frenzy are now smiling -- all the way to the bank.

Ye Ol' Seller Subsidy`

You're reading through a real estate website, searching for houses that might meet your criteria. As you're reading the fine print (and I suggest heavily in reading the fine print), you start seeing the words, "Will help with closing costs," "$5,000 to buyer for closing," "Decorating allowance," "Seller to assist buyer up to 3 percent." These items are referred to as "seller subsidies."
If you're looking for a good deal -- seek out seller subsidies before you look for "Price Reduced." The seller subsidy interprets into real big dollars in the buyers pocket right up front. Even in the long haul, sometimes the $5,000 subsidy means more to the buyer than a $10,000 price reduction and it may be more beneficial to you as a buyer to go for larger subsidies instead of a price reduction. The ultimate win for a buyer would be to get both.
As you develop your strategy on your offer, remember that the best time to get a seller subsidy is in the fall and winter market. Though it means the buyer will be looking over less inventory than the spring, sellers may be softer in their terms and more willing to negotiate when only a few buyers are visiting the house than when they're marching through by the scores. In addition, the market is slowest in the fall and winter and sellers with their homes on the market are serious about moving forward.
(Just a note to sellers -- if you're staying in the same area, list in the fall and winter -- you'll have more serious buyers, and yes, you may have to negotiate downward, but then you'll save a lot on the purchase up.)
When you're looking for the "ripe" properties to work on subsidies and price reductions, look to the DOM -- days on market. The higher the number of days, the more chances you'll have to getting subsidies from the seller. The funny thing about days on market, it's the first indicator that a seller has overpriced the house. The challenge for the seller is that if the prices are dropping quickly, waiting even a few weeks to get the price in order could cost him thousands of dollars. So price it right up front.
Have your agent go over comparables from the neighborhood to determine your offer (sellers do the same thing). You want to make sure you're taking advantage of the speed of your market before making an offer. If other sellers are giving up $10,000 in the community, then you can easily take your offer elsewhere if the seller balks at handing over money to the buyer.
Keep in mind, there are very few rules to how much subsidy is allowed. Most times the limit is between 3 to 6 percent. This limitation is usually from the lender, who wants to see some money from the buyer put into the house. When a buyer places his or her own money into the house, they are less likely to default on the loan.
While this amount may not sound like a lot, just multiply it out -- 6 percent on a $400,000 property is $24,000. That's pretty big savings and can do a lot of redecorating.
Keep in mind how you word the cash that's being left at the table determines whether or not it is a seller subsidy. If, for instance, after the home inspection it's determined the house needs a new roof and the seller agrees to fix it, this is generally not called a "subsidy." The seller is just agreeing to bring the house up to par. However, if the buyer requests $10,000 for a decorating allowance and then spends it on the roof, they have just negotiated a subsidy from the seller. The wording and agreement in exchange of money is important.
The timing of the money spent also may determine if it's a seller subsidy or a seller's own expense. If the seller agrees to paint the interior and gets it done before settlement day, then that's not necessarily a seller subsidy -- the seller is painting his own house and then handing it over to the buyer for the agreed upon price.
If you find a pliable seller, during the home inspection you should note the fix-ups you want vs. the subsidies you want, because it could affect your financing if you wrongly label the cash being spent.