Handling an Appraisal Gap

An appraisal gap describes the difference between the sales price and the lower amount of the appraisal required by the mortgage being obtained by the buyer.  It becomes an issue if the seller is not willing to lower the price or the buyer is not willing to pay the difference in cash.

Looking at the issue from the seller's perspective, "if the buyer wants my home and he can't get the loan he wants, he'll have to make up the difference in cash."  The buyer might have a different view like "If an independent appraiser can't justify the price, I'm not going to pay more than appraised value."

1. Pay the difference in the appraised value and the purchase price in cash. 
   Solution - Assuming the buyer has adequate cash reserves and is willing to pay above appraised value, this will satisfy the lender.
2. Decrease your down payment percentage to apply toward the appraisal gap.  It may trigger mortgage insurance which will increase your payment.
   Example:
   $400,000 Sales Price with 20% down payment of $80,000; Home appraises for $390,000
   Possible solution ... buyer could take $10,000 of the $80,000 he was going to use for the down payment and make up the gap.  That only leaves him $70,000 which is a good downpayment for this size home, but it may require that he pay mortgage insurance because the loan-to-value is more than 80%.
3. Renegotiate the contract with the seller.  Assuming both parties are willing to negotiate on the terms, the seller could lower the price to the appraised value, or any other number of possibilities.
4. Include an appraisal gap clause - "Buyer and seller agree that if the appraised value comes in lower than the purchase price, buyer agrees to pay up to $XX,000 above appraised value, but not exceeding the purchase price."
   
   An appraisal gap clause addresses what the buyer is willing to do within the parameters included.  It provides limited comfort to both the seller and buyer to address the issue of the home appraising for a lower amount than necessary.  This clause provides a way for the buyer to compete in a seller's market.
5. Terminate the contract.

Appraisals can be a confusing but necessary part of the process when the buyer needs a mortgage.  I'm available to answer any questions and share our experience with you. Our goal is to be your source of real estate information.

Make your home offer the most appealing

Sales in March 2023 were down 2.4% month over month and still down 22.0% year over year according to the NAR Housing Snapshot.  The median sales price dipped 0.9% to $375,700 and there are 2.6 months supply of homes on the market compared to 2 months a year ago.

"Inventory levels are still at historic lows, and consequently, multiple offers are returning on 28% of properties." According to Lawrence Yun, Chief Economist for the National Association of REALTORS�.

It is still important to have a strategy for potentially competing with other buyers on the house you want to buy.  The plan should include several available provisions and options, so that at the time of drafting the sales offer, you can consider exactly what to include based on the situation.

Unless a person is paying cash, you need to be pre-approved by a trusted mortgage professional long before you start looking at homes.  Include the written pre-approval letter along with the offer.  When you are making an offer on a home, have the mortgage professional available to reassure the listing agent by phone who will convey assurance to the seller.

If you're concerned about multiple offers, make your best offer first because you may not get to counter and simply lose out to another buyer.  Starting with a low offer and gradually coming up doesn't work in highly competitive situations.  In some cases, a low-ball offer could cast a pall on any consideration of your purchase contract altogether.

The listing agent will calculate the expenses on the different offers for the seller to show them what their net proceeds will be on each contract.  Some types of financing have more costs incurred to the seller.  Asking the seller to make repairs or other financial concessions could lower their net even though your offer may be higher.

From a buyer's standpoint, contingencies provide options for things that may be uncertain like qualifying for a mortgage, discovery of major impediments to the condition of the home, and other things.  To the seller, they are obstacles that may invalidate the contract causing the home to go back on the market.  If the contingencies are necessary, try to make them as palatable to the seller as possible.

Instead of waiving your rights to make inspections, consider a very short inspection period to minimize the time the property is in limbo.  Instead of asking for repairs, provide a simple "accept or reject" once the inspections have been made.

Try to accommodate the seller's desired closing and possession dates.  Sometimes an earlier date may be more desirable for a seller and other times, it might be a later date based on the home they'll be moving into.  Your agent can do some research and find a flexible alternative that may appeal to the seller.

Increase your earnest money deposit more than the minimum.  It is a pecuniary indication that you are serious.  Your agent can tell you what the amount should be and alternatives like increasing the earnest money after certain contingencies have been met.

Escalation clauses state that you are willing to increase your offer by a certain amount up to a specified maximum, subject to another bona fide offer being received before yours is accepted.  Your agent will be able to further explain how these might work in your situation as well as share their experience with them in other similar negotiations.

You as a buyer and your offer to purchase need to be seen as the solution to the seller's situation in price, terms, and reliability to close.  Working with an experienced agent with seasoned negotiation skills is key to your success in buying a home in a competitive environment. 

Protect yourself with a new construction inspection

Builders of new homes offer or are required to warrant their work for a specified period.  Municipal inspections are generally required during different stages to "ensure the life, health, safety, and welfare of the public" but even if something is missed, the ultimate responsibility for building to code belongs to the builder, even if the municipal inspector misses something.

There are four basic stages of residential construction including:

1. The foundation stage begins with excavation, footings, foundation walls or slab, waterproofing, backfill, compaction and underground rough plumbing and electricity.  Municipal inspections are done prior to pouring the foundation while items are visible.
2. The framing stage includes the wood or steel framing, exterior walls and roof sheathing, exterior trim and siding, windows, doors, and roofing.  Depending on the municipality, there could be inspections of the rough framing separate from the roofing. 
   Next in this stage comes rough plumbing including water, waste, and vent piping, rough electrical, rough mechanical, ductwork, wiring, and electrical panel installation.  Municipalities will usually inspect plumbing and electrical separately.
3. The wall insulation and drywall installation are done and inspected depending on the municipality before tape and texturing are done. 
4. The final stage of construction includes flooring, cabinets, millwork, countertops, tile, mirrors, electrical trim, plumbing trim, and mechanical.  Some builders will not install appliances and HVAC until the last stage to protect against theft.  Municipal inspections are made in the final electric, plumbing, and mechanical.

A "Final Inspection" is done after all the periodic inspections have been completed and passed.

Defects that manifest themselves during the warranty period are the responsibility of the builder.  Unfortunately, some things may go undetected until after the warranty expires leaving the repair expense as the sole burden of the buyer/owner.

A safeguard that the purchaser will not be out of pocket for repair expenses is a home warranty which shifts the liability to the warranty or service contract company.  This is a negotiable item that can be paid for by the builder or the buyer.  However, this warranty will have a time limit on it and to continue the coverage, the buyer/owner will have to renew it by paying the additional annual premium.

One more safeguard for the purchaser is to hire their own inspector, to conduct periodic inspections during the different phases of construction.  Unlike an inspection made on an existing home, the inspector will have to visit the site multiple times during the process.  For that reason, constructions inspections are more expensive.

When hiring an inspector for new construction, ask at what stages do they inspect.  A typical new construction inspection might be at the end of the foundation stage, another at the end of the framing and rough plumbing, electrical, and mechanical, and the final inspection after the home is completed.

A provision allowing a buyer to hire their own inspector for periodic inspections should be included in the sales contract.  Your agent can not only help you get that included but assist in negotiation of any issues that arise because of the periodic inspections.

If you value this extra level of protection in the purchase of a new home, it is important that you have your agent first accompany you to the models so they will be registered as your agent.

Higher Interest Rates May be the Help You Need

Like opening and closing a faucet increases and decreases the water flow, lowering interest rates increases home sales and raising interest rates decreases home sales.

When home sales increase during periods of limited inventory, demand increases and prices go up.  Contrarily, when home sales decrease, demand could lessen and prices moderate. 

There is opportunity with higher rates because it affects sales and demand, which in turn keeps prices in check.  By waiting for rates to come down, and no one knows by how much but certainly not to the 3-4% range, buyers' pent-up demand will affect the already low supply and cause prices to increase.

Let's look at a scenario where you could buy a home today for $400,000 with a 90% loan at 6.5% for 30-years with P&I payments of $2,275.44.  If interest rates drop to 5.5% in one year but in that same period, the price goes up by 10%, the price would be $440,000 with a 90% loan at 5.5% for 30-years with P&I payments of $2,248.44.

The payment would go down by $27 a month but the price would have risen by $40,000 which would be equity of twice the down payment for the person who purchased a year earlier with a higher rate.

 

Purchase Price	Mortgage	P& I Payment	Equity EOY1
$400,000	$360,000 @ 6.5%/30 yr	$2,275.44	$84,023
$440,000	$396,000 @ 5.5%/30 yr	$2,248.44	$44,000

 

The takeaway in this example is that a person may experience more loss from unrealized equity during periods of high appreciation than waiting for a nominal drop in the interest rate.  With rates being a deterrent to buyers that have led to sales slipping 22% year over year in March 2023, sellers may be willing to negotiate.

It seems counterintuitive but higher interest rates may be the help you need to buy a home.

Shopping Mortgage Rates

Nobel Prize recipient, Richard Thaler, in his research into seemingly irrational economic behaviors, "found that consumers generally search too little, get confused while evaluating complex alternatives, and are slow to switch from past choices, even if it costs them." "Why are consumers leaving money on the table?"

Based on this behavior, a borrower securing a mortgage might depend on their existing banking relationship or a single referral from a friend or agent rather than shopping multiple lenders.

When shopping for a lower mortgage rate, consider that not all lenders share the same business practices.  Some may lure unsuspecting borrowers to a rate, knowing full well that they cannot deliver on it.  After making a loan application and supplying information necessary for approval, they reveal that the rate is not available for "whatever" reason.

They're counting on the borrower wanting to get into the home because the closing date is near and they'll compromise by accepting the higher than quoted rate.

Shopping for a mortgage rate can result in savings because rates are set by individual lenders.  To get an apples-to-apples comparison, the terms of the mortgage being shopped should be consistent among the lender candidates.

Consumers can make additional savings by not only shopping for better rates but for better terms and fees, which can vary widely among lenders.

The amount of savings can be affected not only by the difference in rates, but the size of the mortgage and the length of time borrowers expect to keep it without refinancing or selling.

• Advertised rates are generally for A++ borrowers and the determination is the lender's based on many factors.  It may be unlikely those rates are offered to you. 
• A recommendation for the best lender from a friend or family member will not necessarily be the best for you.
• Instead of accepting the first offer received, shop for at least three to five offers.
• Your personal bank may be convenient but it may not offer you the best rate, terms, and fees.
• Ask if there is room to negotiate the rate or fees.

Ask your real estate professional for recommendations of several trusted lenders for you to shop a rate, terms, and fees. 

Who Benefits from Selling a Home "As Is"?

A person's decision to sell their home comes with a lot of other decisions causing an owner to stress or procrastinate.  Early in the process, the owner will consider selling the home "As Is" to avoid the looming issues that accompany selling a home.

From a seller's standpoint, "as is" means the buyer will purchase the home in its current condition without asking for any repairs.  While it is convenient for the seller to take this approach, the normal trade out is the property will not result in the highest possible sales price.

Regardless of how the home is sold, the seller is required to disclose all defects which include repair history, condition of systems and appliances, water damage, pest infestation, radon, and other things that affect the value and livability of the home.

From a buyer's point of view, they may think there is something wrong with the home which could result in them avoiding the home completely or making a substantially lower offer to cover not only the known issues but also the unknown ones.

It would be reasonable for a seller to allow a buyer to make inspections to determine what the condition of the home and what kind of expenses they might be faced with.  In some situations, based on provisions in the sales contract, the buyer, after making inspections, may decide not to continue with the contract which could extend the marketing time for the seller by having to find another buyer.

Selling a home "as is" is like wholesaling the property.  A comparison could be trading your car to a dealer when buying a new one.  The dealer will usually give you the best price for the new car but won't offer you a retail price for the trade-in.  If the dealer were to give you a "retail" price for the trade-in, they would probably expect a "retail" price for the new purchase.

Even if the seller doesn't want to go through the effort to make major improvements, they still need to consider things that will ease the buyers' concerns about the home.  These include a thorough cleaning, decluttering, yard cleanup, and repairs on known issues like leaking faucets, lighting, doors, and appliances to name a few examples.

If this path is taken, the cost to the seller will be not realizing the maximum sales price compared to comparable homes that have sold recently in the area that have been updated.

Sellers Pros & Cons	Buyer Pros & Cons
Not spend money to prepare the home	Lower purchase price
Won't maximize proceeds from the sale	Less competition from other buyers
Could sell quickly if priced properly	Financing could be challenging
May take longer to sell	Looking for an opportunity to build sweat equity
Effort finding/negotiating with contractors	Improve the property to your preferences
Investors looking to make a profit	There may be hidden problems
Making decisions on what the public wants

There are companies who will buy your home for cash.  Their ads are very appealing to sellers because it solves their concerns about putting the home on the market.  Realize these companies are not charities but "for profit" who expect to be able to recoup the money paid to you, pay all repairs, renovations, and sales expenses plus make a profit for the risk taken.

As a homeowner, you will always realize more of your equity by approaching it with a risk/reward analysis to determine how to sell it for the highest price with the least expenses.  Your real estate professional will act as a fiduciary to put your best interests ahead of their own.  It is worth the effort before embarking on an "as is" scenario.

A Lesson on Housing from the 80's

Doing nothing may be a lot more costly than doing something.  With rates twice what they were in 2021 and the first half of 2022, many buyers are sitting on the sideline.  For some, it has to do with not being able to afford the home they want at today's mortgage rates and for others, it is not willing to accept that the low rates that were available are not only gone, but may never be available again.

In the late 70's, rates were around 10% and in the early 80's went up to 18%.  Interestingly, many buyers went ahead and purchased at those record level highs and refinanced a few years later when rates came down.  By the end of the decade, prices had continued to increase so that buyers had a significant equity in their home.

Tenants who waited for the rates to go down didn't see savings because the price of homes had gone up.  More importantly, they missed the opportunity to build equity in their home through amortization and appreciation.

If you purchased a $400,000 home today on an FHA loan at 6.3% for 30 years, your total payment with taxes, insurance, and mortgage insurance premium would be about $3,459 a month.

That payment could save you a little bit if you were paying $3,500 for rent.  However, when you consider the monthly appreciation, assuming a 3% annual rate, and the monthly principal reduction due to amortization, the net cost of housing would be $2,229.  You would be paying $1,270 more each month to continue to rent which would amount to over $15,000 in one year alone. 

That loss would be about twice the amount of the down payment to get into the home.  Furthermore, in seven years, at the same 3% appreciation, your $7,500 investment in a down payment would grow to $138,000 in equity in seven years.  If the appreciation is greater than that, the equity would be much more.

You're going to be paying rent to live in a home; you might as well benefit from the equity buildup from amortization and appreciation that is only available to the owner.

The benefit of acting now is that sales are down which are affecting prices, although not dramatically.  When the Fed gets a handle on inflation, and interest rates do moderate some, more buyers will be in the market and supply and demand will again cause prices to rise.  Then, you can refinance to a lower rate but your investment in the home will be at a lower basis.

To run your own numbers, use our Rent vs. Own.  If you have questions, call me and I'll explain how to use it and what to expect for the home you'd like to have.

Make Your Home Offer the Most Appealing

Sales in February 2023 were up 14.5% month over month and still down 22.6% year over year according to the NAR Housing Snapshot.  The median sales price dipped 0.2% to $363,000 and there are 2.6 months supply of homes on the market compared to 1.7 months a year ago.

"Inventory levels are still at historic lows, and consequently, multiple offers are returning on a good number of properties." According to Lawrence Yun, Chief Economist for the National Association of REALTORS�.

It is still important to have a strategy for potentially competing with other buyers on the house you want to buy.  The plan should include several available provisions and options, so that at the time of drafting the sales offer, you can consider exactly what to include based on the situation.

Unless a person is paying cash, you need to be pre-approved by a trusted mortgage professional long before you start looking at homes.  Include the written pre-approval letter along with the offer.  When you are making an offer on a home, have the mortgage professional available to reassure the listing agent by phone who will convey that to the seller.

If you're concerned about multiple offers, make your best offer first because you may not get to counter and simply lose out to another buyer.  Starting with a low offer and gradually coming up doesn't work in highly competitive situations.  In some cases, a low-ball offer could cast a pall on any consideration of your purchase contract altogether.

The listing agent will calculate the expenses on the different offers for the seller to show them what their net proceeds will be on each contract.  Some types of financing have more costs incurred to the seller.  Asking the seller to make repairs or other financial concessions could lower their net even though your offer may be higher.

From a buyer's standpoint, contingencies provide options for things that may be uncertain like qualifying for a mortgage, discovery of major impediments to the condition of the home, and other things.  To the seller, they are obstacles that may invalidate the contract causing the home back on the market.  If the contingencies are necessary, try to make them as palatable to the seller as possible.

Instead of waiving your rights to make inspections, consider a very short inspection period to minimize the time the property is in limbo.  Instead of asking for repairs, provide a simple "accept or reject" once the inspections have been made.

Try to accommodate the seller's desired closing and possession dates.  Sometimes an earlier date may be more desirable for a seller and other times, it might be a later date based on the home they'll be moving into.  Your agent can do some research and find a flexible alternative that may appeal to the seller.

Increase your earnest money deposit more than the minimum.  It is a pecuniary indication that you are serious.  Your agent can tell you what that amount should be and alternatives like increasing the earnest money after certain contingencies have been met.

Escalation clauses state that you are willing to increase your offer by a certain amount up to a specified maximum, subject to another bona fide offer being received before yours is accepted.  Your agent will be able to further explain how these might work in your situation as well as share their experience with them in other similar negotiations.

You as a buyer and your offer to purchase need to be seen as the solution to the seller's situation in price, terms, and reliability to close.  Working with an experienced agent with seasoned negotiation skills is key to your success in buying a home in a competitive environment.   Download our Buyers Guide.

A New Perspective on the Housing Market

The housing market in 2021 and part of 2022 was anything but normal.  Mortgage rates were at all time lows and may never reach those levels again.  Double-digit appreciation drove prices to new heights.  Low inventories fueled by high buyer demand made multiple offers a normal expectation.

As we look at the market snapshots provided by MLS in the various markets across the U.S., it appears that things may be returning to normal, but not necessarily in all areas.  While there are more homes on the market now than a year ago, there are less sales due primarily to the doubling of mortgage rates in 2022.

Time on the market is lengthening but that can be explained by the removal of approximately 15 million homebuyers who now have affordability issues.  When the market shifted, sellers expectations for what they thought their home is worth are not keeping pace with current conditions.

Some sellers who didn't put their home on the market in 2021 and 2022 for whatever reason, remember the peak of the prices they could have sold their home for and now that they are ready, instead of looking at today's prices, still expect to get the higher value.

Every experienced agent knows that all real estate is local and while you can look at trends on a national basis, it takes a knowledgeable professional to assess the local market, even on a neighborhood basis, to determine what a property will reasonably sell for currently.

A seller who has owned their home for several years is going to realize a good profit and return on their investment.  If they are ready to sell in today's market, that should be their focus and not on what might have been, had they sold at the recent high.

There is no way to predict when prices will achieve their high whether it is in stocks, bonds, commodities, or housing prices.  It is only after it has hit the pinnacle and started retreating, that It can be identified.

Don't be concerned about the market you missed regardless of whether you are a buyer or a seller.  When real estate is viewed as a long-term investment, time takes care of things that can be incredibly stressful in the short term.

The average 30-year fixed-rate mortgage for the last 50 years is 7.76% according to the Freddie Mac PMMS survey.  The current 6.60% is considerably below that benchmark and it appears to be trending lower.  The current rate is what today's buyer must pay to borrow.

Home prices have experienced 7.16% appreciation for the last fifty-five years according to the Federal Reserve Economic Data of the St. Louis Fed.  Compared to the average inflation rate of 4.3% for the same period, homes provide a hedge against inflation and a significant contribution to personal net worth.

If you're in the market to buy or sell, contact your real estate professional to find out what your market is doing and what options you have available.

Rethinking Backup Offers

Like with any professional, there are tools and techniques available to help with particular situations.  They might be more popular at certain times and might even be put aside or forgotten at others. For real estate professionals, one of those is the backup offer. 

In a situation where there are multiple offers, the seller can accept any offer for whatever reasons are important to them, leaving the makers of the other offers disappointed.  There is always some uncertainty that the buyers on a contract will close accordingly.  To hedge on that possibility, the seller may choose to make a counteroffer to one or more of the other offers to be a backup should the primary contract not close.

From a buyer's perspective, the purpose of a backup offer is to be next in line to have the chance to purchase the property should the first contract fall through. The benefit is that you'll be next in line to purchase the home without having to submit another offer and possibly, get into a bidding war.  It simply moves from the first backup to the primary contract position.

The buyer in the backup position also experiences uncertainty if it will work and possibly, feeling like they could be wasting their time while waiting to hear the outcome of the first contract.  Some of these buyers will continue to look at homes in the likelihood that another acceptable or better property becomes available.

Should this situation occur, the buyer in the backup position may or may not have the ability to withdraw from their contract.  It will depend on how the agreement is written.  It is important to understand the rights and limitations, as well as when they can be exercised.

A backup offer can lock you into a binding contract until the primary contract's buyer is approved and closed or until it fails to close and the backup buyer becomes the primary.  The backup may or may not have a unilateral way to withdraw the offer prior to one of these outcomes.

Considerations that need to be understood by sellers and buyers alike are:

• Can a buyer in a backup contract unilaterally withdraw at any time?
• Will the earnest money be deposited on a backup offer?
• Will the timelines for contingencies like mortgage or inspections need to be made before becoming the primary contract?
• Will there be any fees incurred by the backup buyer?

Sellers sometimes use a backup offer to apply leverage to the primary contract's buyer.  For instance, if the seller feels the buyers' demands on repairs are too high, the seller might say something like "if you're not willing to accept it 'as is', I have another buyer waiting to do so."

Many buyers, as well as their agents, don't want to obligate themselves to a back-up offer.  However, in certain situations, it is a good tool to have the opportunity to purchase a home that meets their needs.

In the highly competitive market experienced in 2021 and part of 2022, some buyers may have been reluctant to use a backup because of the slim possibility that it would become the primary.  With the shift in the market due to the interest rate increases, a backup offer could be a viable tool to get the home of your dreams.

Your real estate professional can help you understand the advantages and disadvantages of backup offers.  Recognizing that contracts are legal and binding agreements, you can also consult an attorney who can confer with your agent to understand the situation.  

Download our Buyers Guide

Playing Monopoly Is Good Homework

If you've ever been in a Monopoly game after most of the properties have been purchased and developed, it can be a relief to land on Free Parking, knowing the dice must rotate to the next player giving you a respite from paying rent.  Like the game, in real life, it would be nice to avoid paying rent and even better to have people paying you rent for property you own.

Winning in the game of Monopoly is all about investing.  If you travel around the board, trying to buy the ultimate property and pass Go to get another $200, you're missing the opportunity to purchase good properties along the way that could lead to upgrading into your dream home.

Starting early to buy your first home gives a buyer a chance to acquire a property with a minimum down payment, and inevitably, have a lower payment than paying rent for a similar home.  As the home appreciates and the loan amortizes, the equity grows.  Within a few years of average appreciation, the down payment can double or triple based on the leverage of using other people's money.

They could use the equity to stair-step their way into a larger home and finally, their dream home.  Or, if that homeowner's goal is to acquire rental properties, they could convert that home to a rental and buy another home on a low-down payment, owner-occupied mortgage to allow that property's equity to grow in the same way.

Multi-unit properties could be another option.  Finance it with the same type of owner-occupied, low down payment mortgage to achieve leverage that isn't available to non-owner-occupied investors; live in one unit and rent the others.  FHA, VA, and conventional mortgages allow for owner occupants to purchase up to a four-unit building with minimum down payments.

It is very impressive to see the portfolios of properties that some young people have built by focusing on their goals, living within their means, and not getting distracted along the way.  You can learn a lot from them but be careful about getting into a game of Monopoly with them; they know how to play the game.

Let's connect and talk about some of the specifics.

 

Getting Comfortable with the New Normal Mortgage Rates

The biggest shock to homebuyers is the soaring mortgage rates of 2022 that doubled in one year resulting in approximately 15 million mortgage ready buyers displaced from the market due to affordability issues.

As of February 23, 2023, the 30-year fixed rate mortgage was at 6.5%.  While that is twice as high as it was on January 6, 2022, it is still lower than the 7.75% average rate since April 2, 1971, according to the Freddie Mac Primary Mortgage Market Survey.

When rates increase at a rapid pace like this, it takes time for the public to adjust and begin to accept it as the new normal.

Prior to the housing bust that led to the Great Recession, the normal for mortgage rates was in the 6% range and existing home sales were over 6.5 million for three years.  From 2007 to 2014, home sales were closer to 5 million with 2008-2011 at just above 4 million annually.

From January 17, 2008 to March 5, 2020, mortgage rates averaged 4.32%.  In this 12-year period, buyers experienced some of the lowest mortgage rates ever and became to expect that rates would always be that low. 

Then, during the hardest part of the pandemic, the government took unprecedented actions to influence rates even lower to where they averaged 3.06% between March 5, 2020 and March 17, 2022.

It appears that mortgage rates have peaked in this latest cycle.  In December 2022, the rates came down for four straight weeks following two weeks of slightly higher rates.  The question is what to anticipate for 2023.

The National Association of REALTORS� is expecting mortgage rates to be below 6% in the last half of 2023 possibly, 5.5% to 5.7%.  Zillow's chief economist believes rates will drop to around 5.5% for 2023.  The Mortgage Bankers Association expects that "30-year mortgage rates will end 2023 at 5.3%."  Fannie Mae forecasts rates will end 2023 at 5.7%.

Relying on the experts, rates are not going to return to the unusual levels during the pandemic or even in the past 12-14 years.  The new normal may well indeed be at the mid-5% level and when the public gets use to it, sales will begin to rise again.

Some buyers may need to adjust their price points because higher payments are directly impacted by the higher rates.  Even if they could have afforded more with the lower rates, that was a missed opportunity.  When the Fed gets inflation under control and the market rebounds from the pent-up demand, another window could be lost.

David Stevens, CEO of Mountain Lake Consulting, and former Assistant Secretary of Housing recently said in a LinkedIn post talking about the housing market in 2023 "So be advised...this may be the one and only window for the next few years to get into a buyers' market. And remember...as the Federal Reserve data shows...home prices only go up and always recover from recessions no matter how mild or severe.  Long term homeowners should view this market...right now...as a unique buying opportunity."

When do you lock your mortgage rate?

Locking your interest rate protects you from increases due to market conditions.  Locking early safeguards your budgeted payment.  By locking the rate, if the market goes up, you get the lower rate; if it goes down after the lock, you may be able to pay a fee and lower the rate.

Knowing when to take the lock is determined by which direction you think the market is going.  If you think rates are going up, lock in early.  If you think rates are going down, ride the rate to within a few days of closing.

Some lenders may allow a borrower to lock a rate after pre-approval but is more common to not offer a lock until there is a signed contract on a home.  Even with a pre-approval, it could easily take 30 days or more to close a transaction and the rates can move a lot in that period.

There may be a fee charged to lock a rate which is determined by the lender.  Generally, the longer the time for the rate lock, the higher the fee.

There is a lock period established by the lender that guarantees the rate, if the loan is closed by the expiration date.  Normal lock periods can be between 30 to 60 days.  Longer periods may be available but will probably require higher fees.

Things that could affect your rate lock are:

• The appraised value comes in lower than what was expected in the sales contract.
• The borrowers' credit changes considerably before the closing.
• The loan amount changes after the rate lock.
• The loan type changes.
• The down payment decreases before the closing.
• Some income, like bonuses or overtime, could not be verified.

If a higher rate at closing means that you will no longer be able to qualify for the mortgage, it may be more important to lock in early.  Looking at what the rates have done for the preceding weeks may indicate a trend but at the same time, markets have turned overnight and started moving in the opposite direction.

A trusted mortgage professional can give you good advice and why they feel you should either lock the rate or let it ride.  Your real estate agent can help also but ultimately, the decision is yours.

Get the Buyer Incentives to Act Now

Sellers, who last year, were not willing to make any concessions, are much more likely to do so this year due to the softening of the market because of inflation and higher mortgage rates affecting affordability for buyers.

Concessions can take place in different forms.  A seller could offer to pay the buyer's closing costs or pay points for the buyer to get an FHA or VA loan.  Another option would be to pay for a 2/1 buydown that would lower the buyer's payments in the first two years of the mortgage.

Buydowns can be temporary or permanent and are achieved by pre-paying the interest at the time of closing.  Typically, the seller will do this as an inducement to the buyer.  While individual lenders set the price for permanent buydowns, a common rule-of-thumb would be two points, or two percent of the mortgage amount, to buydown the rate 0.5% for the life of the mortgage.

A more common type of buydown is a 2/1 where the payment is calculated at 2% lower than the note rate for the first year and 1% lower for the second year.  The third and following years, the payment would be calculated at the note rate.

$400,000 Purchase Price, 80% loan-to-value @6.27% for 30 years  Cost of buydown - $8,099
	1st year	2nd year	Remainder
Payment Rate	4.27%	5.27%	6.27%
P&I Payments	$1,775	$1,992	$2,221
Monthly Savings	$446	$229

 

In the example above, the seller would pre-pay the interest on the buyer's mortgage for the first two years to subsidize the difference in the note rate and the payment rate.

A 2/1 buydown is a fixed interest rate mortgage where the buyer must qualify at the note rate.  It is a standard, conforming loan and applies to FHA, VA, or conventional.  The benefit is that the buyer will have lower payments for the first two years which can help them settle into the home and not exhaust their resources initially.

Closing costs and pre-paid items are commonly included in seller-paid incentives for the buyer.  Many times, they are described in the listing and/or sales agreement as "Seller to pay up to $X,000 in closing costs or pre-paid items on behalf of the buyer."

The benefit to the buyer is that less money is needed to close the loan.  Lenders are agreeable to this type of provision if it is stated in the sales contract.

Car dealers have been providing incentives in the form of upgrades, below market interest rates, pre-paid regular service for a period, and other things to incentivize a buyer to purchase now.  It is also common practice for new home builders to do the same.

In the resale home market, while these things have been done in the past, there wasn't a need for sellers to incur the additional expenses with such a short supply of homes.  The market certainly changed in 2022 with fewer qualified buyers in the market due to the higher interest rates.  Now, sellers are starting to offer incentives but regardless, buyers can include the incentives in a sales contract for the seller to consider.

Your agent will be able to help you understand what things are common in your market to help with some of the concerns facing buyers today.

Compare Before Deciding on the Standard Deduction

The TCJA of 2019 dramatically increased the standard deduction so that many homeowners benefit from taking that rather than itemizing their deductions.  Taking the standard deduction may result in a larger deduction even if you have no expenses that qualify for claiming itemized deductions.

Another thing reinforcing taking the standard deduction was low rates at the time and the interest plus property taxes were less than the standard deduction.

In 2022, mortgage rates more than doubled, so, anyone who purchased a home or refinanced at the higher rates might benefit from itemizing rather than taking the standard deduction.  The takeaway in this article is to compare both methods each year to see which way provides the larger deduction.

For 2022, the standard deduction for married couples filing jointly is $25,900, for single filers and married individuals filing separately is $12,950, and for heads of households is $19,400.  There are increased amount for seniors over 65.

Mortgage interest, points paid to purchase a home (paid by seller or buyer), and property taxes are deductible on Schedule A.  Other items allowed as deductions are charitable contributions, medical expenses in excess of 7.5% of taxpayers' adjusted gross income, and casualty and theft losses from a federally declared disaster.

In 2019, IRS reported that 89.5% of people took the standard deduction which is easier to file, doesn't require receipts, and may yield a higher deduction than itemizing but the only way to be sure is to compare both ways.

For more information, download Publication 529 or contact your tax professional.  Download our Homeowners Tax Guide for more information on homeowner taxes.

Negotiate a Buydown to Get into a Home Now

If you are a prospective homebuyer, things have changed in the past year.  Most notably, mortgage rates have more than doubled which has created an affordability gap that has taken approximately 15 million buyers out of the market.

Inventories are growing but it isn't because more people are deciding to sell their homes; it is because it is taking longer to sell properties because less people are qualified.  Current housing inventory is a little more than a quarter of what it was in 2008.

Buyers are wondering when the market will return to normal, as if mortgage rates at three and four percent should be commonplace.  The average mortgage rate between April 1971 and November 2022 is 7.76%.

Predictions for mortgage rates in the third quarter 2023 range from 4.5% for Fannie Mae, 5.0% for Mortgage Bankers Association, and 5.2% for Freddie Mac.

Traditionally, over the past 35 years, there is a 175-200 basis point difference between the 10-year Treasury and the 30-year mortgage rates.  However, recently, the spread has been 300 basis points.  Some experts explain this to indicate that the Fed's tactics for lowering inflation is working and the mortgage market will soon respond which is indicated by lower rates in the past few weeks.

"The gap between the 30-year fixed mortgage rate and the government borrowing rate is much higher today than it has been historically," NAR Chief Economist Lawrence Yun, said. "If we didn't have this large gap, mortgage rates wouldn't be 7%, they would be 5.8%."

There is opportunity for prospective buyers in today's market.  The slowing of housing sales, down 34% from December 2021, have changed the environment buyers were experiencing in 2020 and 2021.  Instead of having to pay a premium over the list price, many sellers are willing to negotiate on price.

Without multiple offers being the normal, buyers can expect to include contingencies for financing, appraisal, inspections, and possibly, the sale of a home currently under contract.

Some buyers who are confident that mortgage rates will come down soon have opted to purchase now with an adjustable-rate mortgage.  This can lower the rate by about one percent for the first period which can be five years.  When mortgage rates returned to acceptable, the borrower could refinance to a fixed-rate mortgage.

Another option to consider would be to do a buydown on the mortgage rate.  Assuming that in the "softer" market, the seller would accept an offer to buydown the interest rate for the first two years.  It would allow the buyer to purchase at today's prices, with much lower payments for the first two years.

Example

$500,000 Purchase Price, 80% loan-to-value @6.13% for 30 years | Cost of buydown - $8,934
	1st year	2nd year	Remainder
Payment Rate	4.13%	5.13%	6.13%
P&I Payments	$1,940	$2,179	$2,432
Monthly Savings	$492	$253

 

This type of mortgage is a standard, conforming, fixed-rate loan where the buyer must qualify at the note rate.  The payment for the first year is 2% less than the note rate and for the second year is 1% less than the note rate.  The difference must be paid in advance at closing and in the case of this example, the seller paid it based on contract negotiations.

During this period of lower payments, if the rate comes down, they could refinance the property.  Let's further assume that the rates come down at the end of the first year.  If the property is refinanced before the pre-paid interest is owed, the lender is required to reimburse the borrower which could be applied toward the cost of refinancing.

When the mortgage rates do return to an acceptable rate, there may be considerable pent-up demand from the mortgage-ready buyers who were priced out of the market.  This could lead to another seller's market where high competition results in prices above list price and sellers not willing to accept contingencies.

Temporary rate buydowns have been available for decades.  Their main purpose is to help a borrower get into a home with lower payments initially.  In some cases, they need it because they depleted their cash reserves on the down payment; in other situations, maybe, they are upwardly mobile and expect to be making more income soon.

The reason lenders across the country are talking about them now is because they provide a reasonable and viable alternative to buying a home at today's prices without having the higher payment initially for the current rates.  It especially makes sense if you believe that rates are coming down soon.

Your real estate agent can give you more information about this and explain how you can negotiate with the seller to pay the fee to get this type of loan.  Call us at (801) 726-1443.

If you're on the sidelines, at least get ready...

If you're on the sidelines to buy a home, there are things you can do to be ready when you do get back in the game.

Improve your credit score to qualify for the best mortgage rate available which are reserved for those with the highest scores.  Get a copy of your current credit reports from all three of the main credit bureaus: Equifax, TransUnion, and Experian.  You can get them at AnnualCreditReport.com without paying for them.

While you won't see a credit score on these reports, you will see a history of your available credit accounts.  According to the Federal Trad Commission, one in five people have at least one error on one of their credit reports which can lower your score or increase the cost or likelihood of receiving new credit.  Identify and correct these mistakes. 

Explain in writing the error in the report and include copies of documents that support your dispute.  Both the credit bureau and the business that supplied the information must correct the information that is in error.  There will not be a fee to correct it.  You can get specific info for the process on each credit reporting companies' website and from the FTC Consumer Advice.

There is a term call "credit utilization" which describes how much of your available credit on each revolving account is currently being used.  If the limit on one card were $10,000 and you had a $5,000 balance, the utilization ratio is 50%.  Amounts above 30% can negatively impact your credit score even if you do pay the balance each month.

Any delinquent items that may appear on your credit report need to be cleared up.  Regardless of whether there is a legitimate reason, it needs to be explained to the credit bureau.  Beginning in 2023, medical collections less than $500 will no longer be reported on consumer credit reports.

Continue to save for a down payment because mortgages less than 80% of loan-to-value require mortgage insurance which increases the monthly payment.  The exception to the rule is for VA loans which do not require it.  The cost of mortgage insurance could add 0.5% to 2% or more to the payment.

Lower your debt-to-income ratio by paying off installment loans for cars, boats, and other things.

While there are legitimate credit repair services available, you may be able to get excellent advice from a trusted mortgage professional.  You'll eventually want to be pre-approved before you start looking at homes.  Your real estate agent can make a recommendation to connect you with someone who will get you ready to get back into the game.

Negotiating Your Position

The seller wants the most for their home and the buyer wants to pay the least possible.  From the very beginning of the homebuying process, there are adversarial positions between the principals.  If you happen to be in a multi-offer situation, it just complicates things further.

Then, there are the emotions that tend to cloud the decision making on both sides of the transaction.  Sellers have lived in the home for years, possibly, with cherished family experiences and maybe, having put considerable effort and money into capital improvements.

On the buyer side, they may have lost out on several homes due to competing offers and now, this year, interest rates have doubled, and the discretionary funds required to pay for a home could be causing cuts in their budget in other areas.

A year ago, buyers were waiving contingencies for financing, appraisals, inspections, and other things just to be competitive.  Today, to make the home more affordable with the higher mortgage rates, buyers need the seller to make financial concessions but who is going to make their case to the seller for them?

The role of a third-party negotiator played by the real estate professionals has always been valuable to the success of the transaction but now, it may even be essential.  Sellers enjoyed an extraordinary market in their favor for the past two years with incredible appreciation and so many buyers chasing so few homes, the sellers were able to write their own ticket.

Inflation and mortgage rates have put the brakes on the market, eliminating over 15 million mortgage-ready buyers.  The buyers who are still in the market need to be cautious, so they don't overextend themselves and overpay for a home.

The agents can assist both the buyers and sellers in seeing things in an objective way that reflects the current market and not the way it was a year ago.  All parties must be reasonable and not expect too much.  They need to consider facts and not feelings.

Negotiating the sale or purchase of a home is a competition; for one person to get something, someone must give something up.  If a person doesn't feel comfortable with this, it is important to work with an agent who can bring their skills to the table on your behalf.  As your advocate, they can champion your position and put transactions together that would not have been possible if it were left to the principals alone.

Negotiation skills are acquired through training and experience.  When interviewing an agent, ask them what role negotiation plays in their marketing plan if you're a seller and purchase plan, if you are a buyer.  An agent who cannot defend their position in the transaction may not be the right person to defend yours.

The 2023 Limit for TAX-FREE Gifts is $17,000

PROFESSIONAL ADVICE: The Company and its Agents are trained in the marketing of real estate. Neither the Company nor its agents are trained or licensed to provide legal or tax advice. If you desire legal or tax advice, consult your attorney or tax advisor.

Surviving Spouse Sale Period

Married couples who own a home as joint tenants with rights of survivorship, the surviving spouse inherits the home, along with their basis, and it does not trigger a taxable event.  Unfortunately, the capital gain exclusion is reduced to a single person's share unless the survivor disposes of the property in the granted time.

Married couples, filing jointly, have up to $500,000 of capital gain exclusion on qualifying sales.  As a single taxpayer, the survivor is only entitled up to $250,000 exclusion of capital gain.  For instance, if the home at the time of death is worth $900,000 with a basis of $400,000, the gain is $500,000.  If the surviving spouse sells the home, their exclusion is only a maximum of $250,000 which would make the other $250,000 subject to long-term capital gains tax.

However, there is an exception to the rule that if a sale occurs within two years of the death of their spouse, the survivor is entitled to the $500,0000 exclusion if the ownership and use tests are met prior to the death.  The two-year period begins on the date of death and ends two-years after that date which means the property needs to close and fund by that anniversary. 

For more information contact your tax professional and download IRS Publication 523 and download the Homeowners Tax Guide.

Are prices and rates going to continue to rise?

One of the most talked about questions in the real estate market has to do with "Will prices continue to rise now that interest rates have increased dramatically this year?"

It is understandable to think that if the Federal Reserve is using interest rate increases to slow consumer demand, that it would also slow homebuyer demand to moderate prices.  Unfortunately for would-be homebuyers, it isn't the case.  High inflation, strong economic growth, low unemployment, and increased wage growth have been associated with high home price appreciation.

In a recent newsletter from First American, Chief Economist, Mark Fleming stated that historically, 90% of total inventory is from existing homes and homeowners are not moving as often as in the past.  Prior to 2007, the average tenure was five years.  After the housing crisis, between 2008 and 2016, the length of time spent in a home went to eight years.

Lawrence Yun, Chief Economist with the National Association of REALTORS� when talking about the May 2022 statistics: "Nonetheless, homes priced appropriately are selling quickly and inventory levels still need to rise substantially ... almost doubling ... to cool home price appreciation and provide more options for home buyers."  Median sales price rose to a new high of $403,800, up 10.8% from July 2021, while sales are down 20% year over year and inventory increased slightly to 3.3 months from 2.6 months in July of 2021.

In the beginning of 2022, Fannie Mae, Freddie Mac and NAR predicted home price appreciation would be 7.6%, 6.2%, and 5.1% for the year.  Their revised forecast has been increased to 16%, 12.8%, and 11.5%.  Buyer demand still exceeds inventory levels which is driving prices higher.

While the Fed does not set mortgage rates, it does determine the Fed Funds Rate which is charged by banks to each other for overnight funds.  The increases often affect the U.S. Treasury rates to increase and there is generally a reaction when the 10-year U.S. Treasury Note yields increase for the 30-year mortgage rates to increase also.

The National Association of REALTORS�, on their website, states "The Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data."  The Index uses the 30-year fixed rate mortgage as provided by Freddie Mac's Primary Mortgage Market Survey (PMMS).

Mortgage rates have gone up over 2% in the first half of 2022.  That dramatically affects the affordability of the home even if the price didn't increase, which it did.  A $360,000 mortgage at 3.05% in December 2021 would have a principal and interest payment of $1,528 for 30-years.  At 5.22% as of August 11, 2022, the P&I payment is $1,981 or a difference of $453 dollars or a 30% increase.

As of May 2022, homeowners are now staying in their homes 10.6 years.  Part of the reasons can be contributed to the pandemic, but a large degree is attributed to the lack of inventory.  Existing homeowners can sell their home for premium prices and in unusually short time frames, but the problem is finding a home to replace it.

The demand for housing still exceeds the supply and price are continuing to rise, although, maybe not as the same pace as 2021.  Many economists predicted that price appreciation would slow but CoreLogic reported "Home prices nationwide, including distressed sales, increased year-over-year by 20.9% in April 2022 compared with April 2021.  In the same report, CoreLogic predicted "...home prices are forecast to increase on a year-over-year basis by 5.6% from April 2022 to April 2023."

Another frequent question homeowners have is whether to wait to see if prices moderate and interest rates decline.  The probability is more likely for prices to continue to increase along with mortgage rates.  The consequences of waiting, in hopes of lower prices and rates, could totally price a person out of the market for the home they want.

Using a $400,000 home that could be purchased today at 5.22% on a 90%, 30-year mortgage, the P&I payments would be $1,981.  If the price appreciated only 5% in the next year and the mortgage rates were to go up by 1%, the payment would increase by $339 a month.  If a person stayed in the home for 7 years, the increased cost would be $28,458 and if they stayed for full term, it would cost them $121,965 more by waiting.

Increases in rates and prices have forced some people out of the market, at least temporarily.  For the fortunate ones, who can still afford to buy, even with the increases, acting now could save them tens of thousands and maybe hundreds of thousands depending on the price of the home.

Make an appointment with your real estate professional to get the facts on what you home is worth, the mortgages available, and the logistics to put it together for your best advantage.

Indecision Can Be Expensive

With all that is going on in the world, a global pandemic, supply chain issues, highest inflation in 40 years, the economic effects of a war in Ukraine, it can be overwhelming to think about when the right time is to buy a home.

On a local level, there is a pent-up demand for homes that have been building for years.  Builders haven't kept up with demand for new housing for almost 15 years.  Low inventory, especially in the past three years, have driven up prices nationally in 2021 by 20% and even though, the rapid appreciation seems to be moderating, in June, NAR reported that the median price home was up 13.4% from one year ago.

Then, of course, there are mortgage rates that have gone up by 2% since the beginning of 2022.  Appreciation and rising interest rates are a double whammy for people looking for their first home or to move up. It is completely understandable that many people are faced with so much that they are sitting on the sidelines waiting to see if things will improve.

Let's look at a hypothetical situation where buyers have the money for a 10% down payment on a $400,000 home but have decided to wait for three years to see if things improve.  They need to park their money somewhere safe so that it will be available when they feel comfortable to buy but also earn as much as they can to ward off the effects of historically high inflation.

If they were to put the $40,000 into a certificate of deposit for three years that pays 2%, they would earn $2,448 in interest.  With current inflation at 8.5%, the purchasing power of their down payment would diminish.

A slightly riskier alternative would be to invest it in the stock market or a mutual fund.  Assuming they picked the right stock or fund that earned 7%, their $40,000 would grow to $49,002 in the same three-year period.

The problem is that homes are appreciating much faster and the buyers would either pay more to get the same home or to pay the same price in three years, the home would not have the same amenities.    

If the buyer purchased the home today that appreciates an average of 5% per year, the equity in the home in three years would be $118,000 based on two dynamics: appreciation and amortization.  The wealth position at the end of the three years in the home is almost three times what it would be with the certificate of deposit and over twice as much as the stock investment.

Homes have appreciated more than inflation over the last fifty years.  The average home price appreciation from 1970 to 2020 was 7.16% compared to the average inflation for the same period which was 4.3%.  In 2021, home prices were up close to 21% nationally compared to 7% inflation. 

Connect with your real estate professional to find out the facts about the market, the various mortgages available, what you can expect to buy, and if you have a home, what it will sell for.  Good information can make a difference in making a good decision.  Download our Buyers Guide.

Good Records Can Reduce Capital Gains

Regardless of whether you're entitled to $250,000 or $500,000 of exclusion when you sell your home, prices have gone up so much in the past two years, you may be approaching the limit where you might have to pay tax on the excess when you sell.

Any improvements you have made to the home during your ownership can be used to raise your basis in the home which will reduce your gain.  It is worth the effort to start reconstructing the list, both big ticket items and lower priced items that qualify.

While repairs to your home do not count as improvements, other money which either materially adds value, appreciably prolongs the useful life of the property, or adapts a portion of the property to a new use will qualify.  Hopefully, you have contracts and agreements on the major items and receipts on things over $75.

If you have photographs before and after the improvements were made, it can help serve as evidence that they were in fact made. 

The best proof is to record the expenses and receipts as close to when they are made instead of having to dig through boxes and invariably, either not finding them or worse yet, forgetting what was done altogether.

Download more information on this from IRS Publication 523 and the Homeowners Tax Guide.

Moving Down in an Up Market

Selling and buying a lower priced home in an "Up" market can be to your advantage.  The advantage is to maximize the sales price on your existing home and replace it with a less expensive one.

Moving down in an "up" market may be to your advantage in multiple ways.  It is possible that your present home doesn't meet your current needs like it once did.  Making a move can allow you to "re-balance" the equity in your home to better reach your future goals.

The "up" market maximizes the sales price you can expect to receive, and it will free the equity in your home. A lower priced home will result in reducing your housing costs with lower property taxes, insurance, utilities, and maintenance...while improving your liquidity position.

It is not required to reinvest the proceeds of the sale.  You may decide to get an 80% loan-to-value mortgage on the replacement home to get the best interest rate and avoid private mortgage insurance.  This would allow you to put the excess proceeds into an income producing or growth investment, start a business, fund an education, buy a second home, take a spectacular trip, gift a down payment to a relative, or any other different projects.

The expression "other people's money" describes borrowing money and using it to invest with the expectations of earning more than the rate you're paying.  Mortgage interest is one of the most attractive ways to borrow money because it is generally the lowest rate compared to other types of loans while having the option to get a fixed-rate mortgage for up to 30 years.  Most other borrowed funds involve short terms and floating interest rates.

Rental real estate could be a possibility to invest part of the funds.  There is a shortage of available rentals which has caused rents to increase like homes have appreciated.  Single family homes for rentals provide large loan-to-value mortgages at fixed interest rates for long terms on appreciating assets with defined tax advantages and reasonable control not found in many other investments.  For more information, download our Rental Income Properties Guide.

Homeowners who have owned and occupied their principal residence for two of the last five years are entitled to exclude up to $250,000 of gain for single persons and $500,000 of gain for married persons filing jointly.  For more information, see IRS topic #701.

Contact your real estate professional to find out more information like potential sales price, what net proceeds you can expect to receive on a sale, available replacement homes, and the types of mortgages and rates available.

Showing How Earnest You Are

The expression "putting your money where your mouth is" demonstrates a monetary sincerity to what could be empty words.  In today's competitive market where multiple offers are common, sellers want as much assurance as possible that the buyer is sincere and will close on the sale.

The seller who accepts a contract expects the buyer to follow through but, in most cases, doesn't know the buyer either personally or by reputation.  The earnest money submitted by the buyer with the contract shows their commitment to the terms of the offer.

If the amount is relatively small, the seller could be concerned that the buyer may walk away from the contract if they change their mind before closing.  The lost time could be injurious to a seller who is trying to meet a deadline.

The more earnest money a buyer deposits indicates to the seller a higher level of commitment to the contract.  Except for stated contingencies in the sales contract, if the buyer fails to close on the sale, the earnest money could be forfeited.  Significant earnest money makes the seller feel more secure that the contract will indeed close. 

There certainly are a lot of things that can dictate how much earnest money is appropriate.  Local customs, price of the home and type of mortgage can all help to determine the proper amount.  In some areas, it may be common for it to be one to five percent of the purchase price.  In other areas, it might be a specific amount like $1,000 to $10,000 depending on the sales price.  It really comes down to whatever the buyer and seller agree is the proper amount. 

Another strategy is for the buyer to put up an adequate amount initially prior to inspections or other contingencies, and then, to put up an additional amount when the contingencies have been removed. 

The earnest money demonstrates the buyers' sincerity in making the offer and proceeding according to the agreement so the seller can take their home off the market and start making plans to move and give possession of their home.  A higher-than-normal amount could also help the seller to choose yours in a multiple offer situation.  Ultimately, both parties want to close as anticipated according to the contract and the earnest money helps facilitate that. 

Your agent can explain what is customary for your area and price range.  Many times, a disinterested party, like a title company, will hold the earnest money and the sales contract will provide how to dispose of it should the contract not close.

Is Your Home Inventory Up To Date?

A current inventory of all the personal items in your home is important and even necessary, if you are faced with filing a police report or insurance claim. The homeowner is usually asked if they have a home inventory.  If not, the homeowner can reconstruct one to estimate the loss.

Imagine you are in this position; would you be able to make an accurate list of your belongings and their value?  As an exercise, pick a room of your home, and, while being in another room, list all the belongings and their value.  When you're finished with the list, go into the room, and check to see how you did.

This little project should demonstrate the difficulty of reconstructing a list and depending on whether you missed a lot of items and the importance of having an up-to-date home inventory.  Not only will this help you purchase the right amount and type of insurance, having an accurate inventory will make filing a claim easier.

An accurate accounting of your belongings can also help you and your insurance agent  to see that your belongings are properly insured.  Other reasons for a home inventory include creating a maintenance calendar and helping you declutter by getting rid of items no longer needed.  Over half of households do not have a home inventory and the majority of those who do have them, haven't updated them with new possessions purchased since it was done.

The peace of mind having one can be a strong reason for having a home inventory.  It provides confidence that this area is financially organized and prepared should you have need of proving losses.  It will help you and your family return to your normal life after an unsettling event.

Download our Home Inventory for more tips on creating one along with alternatives for documenting your belongings.  If you don't have another media, this will allow you to take pictures and list individual items along with values in a fillable PDF that can be stored safely in your online cloud.

Difficult to Buy What Is Not For Sale

Buyers are becoming discouraged there are not enough homes on the market, especially, in certain price ranges.  When they do find something they want, there may be multiple offers and they end up losing to another buyer.

Some buyers after experiencing several of these instances have decided to wait until the market changes.  It is understandable but it may be a very long wait as well as being a very costly decision.

Inflation is affecting all sectors of the economy; prices on food, cars, and electronics are going up as well as housing and mortgage rates.  Home prices rose 20.2% year over year in May 2022 over 2021, according to a recently released CoreLogic report. 

The advantage to current homeowners wanting to move up is that their home is now worth more and it takes the sting out of the price they will have to pay for a larger home.

Unfortunately, first-time buyers and those who don't currently own a home are seeing the prices continue to increase at a rate many Americans have never seen before.  Waiting is most probably going to make it less affordable.

It is true that housing inventory is at very low levels but over six million homes sold last year so there was enough inventory available for six million buyers.  For buyers, the problem was they sold fast and there was a lot of competition.  The advantage for sellers is they sold fast and there was a lot of competition that increased the price they received.

It may not be as easy as if there were four to six month's supply of homes for sale but when you purchase a home, these same dynamics will be working in your favor to build your equity with appreciation.

Successful buyers are positioning themselves to act decisively when the new listings hit the market. 

1. Working with a trusted real estate professional
2. Pre-approved by a local lender
3. Developed a plan to write a competitive offer
4. Determined their limits financially and emotionally.

Six million people bought homes last year and you can be among the fortunate ones who buy one this year.  Be committed to what it takes in a highly competitive market.  Surround yourself with a competent and confident team that will produce the results you want.

For more information, download the Buyers Guide and schedule an appointment with us to get the facts about the best plan to get you into a home this year.