Is it a good idea to buy real estate in a slow market?
As always, the answer rests with the buyer and his or her motivations. If you’re tired of renting, wish to make an investment for your long-term future, and are prepared to make the mortgage payments, this is stil a good time to buy as, while interest rates have risen, they are still relatively low from a historic point of view. And if you’re not vying against a lot of other buyers for a low-priced home, there’s a good chance at getting a property.
Is this a good time to begin investing in real estate?
As the market is slowing while prices are still holding, it’s still a reasonable time to invest but with the caveat that the investor should be able to afford to maintain payments should the resale market slow further and even dip. Low interest rates make real estate investment attractive, and even though prices are much higher than a year or two ago, the Inland Empire is still relatively affordable. Unless highrises become common on the coast, inland homes are going to increase in value over the long term.
For small-time investors who are looking to find an underpriced property, fix it up, and “flip” it quickly for a profit, they may find it difficult as even fixers are priced high these days in comparison to a year ago. There is a lot of competition from those who are experienced in this type of investment and have the necessary funds at hand.
On occasion, inexperienced buyers ask me about investing in rental property and even fixers for resale. It is still possible to begin such investing at this time, but be forewarned that investors do not get the same interest rates as buyers of their primary residence. Buyers must tell their lenders if they intend to reside on the property or not, and there is an applicable box to check on the residential purchase agreement. If you’re planning to invest for the first time, be sure to ask your lender what interest rates apply and how much your monthly payments wil be in order to make sure that the rent will cover it. And if you plan to sell quickly, be sure to discuss the tax implications with your tax advisor ahead of time, so that there won’t be any surprises.
Buyers: writing offers in a slow market
The California real estate market is continually changing along with the laws that control it and the required forms. So even if you’ve bought property before, you may find that there have been some big changes since the last time you were in the market.
Why are there so few affordable houses for sale?
Interest rates have been good recently, and even while they’re now starting to go up, they’re still low enough to attract many buyers. At the same time, owners have taken advantage of low rates to refinance, and this means that they’re less likely to sell since they would probably end up taking on higher payments. Together these two factors contribute to a situation in which there are many potential buyers and very few affordable houses. Sellers who start out pricing low and willing to look at all offers can still create a good situation for multiple offers. In such instances, the sellers can still be picky, choosing the best combination of price and terms, so buyers need to write strong offers.
To be sure, we’re no longer in a sellers’ market. We’re in a slow phase at the moment, as sellers are not lowering prices despite an abundance of properties on the market. In short, for buyers with less money, there are fewer condos and starter houses to buy, and so sellers have more say over that segment of the market. Their high price tags lead to homes staying on the market longer and even expiring without selling. So those buyers with more cash, and who are perhaps coming from the coast, may view the current Inland Empire real estate scene as a buyers’ market. Of course, if they’re competing with others who are also moving from more expensive areas, they’ll still have to write an offer that’s hard to refuse.
What constitutes a strong offer?
A reasonable earnest deposit and the promise of a large down together are a good sign that a buyer intends to carry through with a purchase. I generally recommend a 1% earnest deposit although occasionally I run into sellers who won't take less than $5000. A low, full-cash offer isn’t necessarily better than a high one that depends on a loan, but the latter is also going to have to show the lender’s letter of approval, proof of funds, and FICO scores.
How much should I bid?
When I sit down to write an offer with buyers, I first pull up information from the Multiple Listing Service to see how much comparable houses in the area have sold for recently as well as the listing prices of those that are in escrow and those currently for sale. This information will help tell the buyers if there will be a problem getting the house appraised for its current list price. Buyers sometimes ask me how much I think they should bid, and the truth is that I can’t tell anyone that. I can ask them to consider how much they feel comfortable offering. I ask them how much their monthly payment would be at that amount and how much their closing costs would be according to their loan agent. If their loan agent hasn’t yet quoted them these figures, I can use Century 21 Lois Lauer software to give them approximate figures. It’s a good idea to consider these matters ahead of time rather than later. It can be painful to walk away from a house that you really like simply because you cannot pay what you promised, and in this situation, you’re not in a position to renegotiate. Sometimes sellers will choose an overbid rather than a sensible offer only to see the overbidders disappear before their check reaches the escrow company. Then these sellers have to contact the other offerors again to see if they’re still interested. For these reasons, it’s of utmost importance that buyers make offers that they themselves are comfortable with instead of feeling forced to make snap decisions.
With the changing market, if it turns out that the home in question has sat for a while without selling and there are some good indications that the listing price is a little high, I can ask the sellers' agent how motivated they are. Perhaps by now they've found another home and need to sell this one in time to get the other. Maybe they're willing to look at a lower offer if it's solid and escrow can close quickly. An extremely low offer will still offend them, but there's now some room to negotiate in comparison to the recent past.
Can I ask for repairs?
A buyer can ask for repairs but needs to remember that a lot depends on the seller's motivations and good will. For instance, if the buyer asks for a major repair or a lot of small ones in the offer, the seller may decide that this buyer is just too difficult to deal with. Of course, if the property has been on the market for a long time, the seller may understand that there s/he needs to fix something in order to make it possible to get a loan (such as a non-fuctioning heating source or a permanent foundation for a mobile home.)
These days, if the house is in good physical condition (and of course, buyers should always get a professional inspection done), and the buyers like it, they might want to wait until they’re in escrow before they start asking for anything. And then they can do just that—request repairs, and then the sellers may respond either positively or negatively. The buyers are in the position of having to ask themselves if the repair (or lack thereof) is important enough for them to walk away from the house. Is it something they can have done themselves later on after they have moved in? Or is it so crucial that they don’t think the house is livable without it? Of course, if they find out that the house has a major problem, they should by all means walk away and have every right to do so.
Ultimately, I tell my buyers to view the professional home inspection as a disclosure. It tells them if there are any major problems, and it points out all the little things they'll need to take care of in the future or else learn to live with.
Are you a first time buyer?
My motto is “ Alma —in pursuit of your happiness” because I believe that it’s very important to take the time to sit down with people and find out who they are. What are their needs and their dreams? I’ll ask you personal questions, but remember that there are no wrong answers. A lot of times, these are questions that you need to ask yourself to help determine your goals.
Sometimes buyers don't want to discuss their financing with me. Ultimately, the money question isn’t for me to judge you but rather for you to begin examining your own needs. So I tell first-time buyers that I will be happy to show them properties once they have decided 1) how much they feel comfortable paying monthly and 2) how much they can afford to put toward closing costs.
You can go ahead and start to consider these questions now, and that way, if you have yet to find a loan agent, you can be sure to communicate what you hope to pay. If you already have a loan agent and he or she has only told you how much you qualify for and at what percent, ask for more information. At that price, how much will you need to pay per month? What will your closing costs amount to and how will they break down? If your expectations don’t coincide exactly with your lender’s answers, ask your lender how to bring them closer together. Are there other loan programs that you qualify for and how do they work?
The main reason to ask these money questions is to find your comfort level. You want to find yourself a new home, improve your life, and invest wisely, but you need to know what you’re taking on. You new home shouldn’t create so much of a strain on you that you can’t enjoy it.
Of no less importance is finding out about your present living and work situations. What parts are you happy with and what would you change? What features of your present lifestyle do you need to maintain? Do you live near relatives or friends that you want to continue seeing often or are there people you want to move closer to? What is your work schedule and will an increased commute time be worth those days off when you can enjoy a larger living space?
Apart from present realities, what are your likes and dislikes? Do you like to play sports or garden? Would you prefer to shop, laze by a pool, or meditate on mountain views? Are there children and pets to think about? Have you thought about schools and parks? Will you need storage space and an extra bedroom for guests? You may also want to consider ahead of time what you want to avoid, so that I can make a point of not showing you places that don’t meet your specifications.
In addition to your present situation, we need to compare your needs for the immediate future with your long-term needs. The home that you need right away may not be the right place for you later on. You may enjoy going shopping now, but would you like to have your kids going to the mall (and asking for money) every afternoon? And perhaps it’s okay with everyone to share a bathroom right now, but it could ease some sibling (and parental!) territorial disputes to have separate bathrooms later on. We could think about different ways of handling the question of short term versus long term. Perhaps it would be worth it to you to find a larger home now but in a more affordable area. Another strategy would be to concentrate on the affordable and see such a property as a stepping stone toward a larger home.
After some discussion with you, I will then start to put all the information together with the aim of presenting you with several scenarios. I discuss neighborhoods that combine aspects of your search in various ways. Your reactions (positive and negative) plus questions in turn help me to understand your priorities. We probably won’t have the same hobbies and tastes, but disagreeing is part of the process. After all, I’m helping you look for a house, not myself, and I need to know how you and I differ.
I will then scan the Multiple Listing Service to give you an idea of homes that are available in particular areas, their listing price, and also recent trends there. We will discuss how much properties have sold for there, the listing prices of the ones in escrow, and how long they were on the market before they sold. Armed with this knowledge, you can begin to strategize before you start going to houses and so avoid wasting your time looking at ones that don’t fit your needs. You will also have a better understanding of what may happen, so that you can make stronger offers and have a better chance of getting that house that you do end up liking and perhaps even falling in love with.
What is 100% financing?
100% financing is an option for buyers who have no equity from another property to invest in another. These people are often first-time buyers, and they must have good credit in order to qualify. They generally receive two loans, the first one for the first 80%, and the second one for 20%, the latter almost always at a higher interest rate. They are not, however, getting the property for free.
They still need earnest deposit money, which will be deposited into escrow when a buyer accepts their offer, even if they will get the amount back after the disbursal of the loan and the close of escrow. They also have to have some savings to cover their closing costs.
Closing costs include, but are not limited to, the loan origination fee, loan discount fee, appraisal, credit report, tax service, document fee, funding fee, processing fee, interest adjustment, mortgage insurance premium, mortage insurance impounds, hazard insurance, hazard insurance impounds, property tax pro-rations, property tax impounds, escrow fee, title policy, recording fees, sub-escrow fee, warehouse fee, Home Owners’ Association Transfer Fee, and so on and so forth. Some of the closing costs are one-time fees while others, such as property taxes, will need to be paid yearly thereafter.
If the lender promises no closing costs, the buyer should get a list of just what that means and an explanation of just how the difference (usually a higher interest rate) will afect him or her. There are loan programs that offer more than 100%, and these will cover some closing costs and might even leave some money for furniture, but they come with high interest rates and require excellent credit.
How does the slow market affect buyers with 100% financing?
The change from a sellers’ market to a slow one has some very positive consequences for buyers who have 100% financing, provided they have enough income to cover the mortgage payment for today’s higher priced homes.
During the seller’s market, prices rose so quickly that appraisals tended to fall behind, forcing buyers to come up with the cash difference if the agreed price was higher eveven after a second appraisal. Buyers with 100% financing found that their offers went unconsidered when sellers knew that comps were not going to support the list price, and listing agents would sometimes evey say upfront that the buyer needed to bring some cash to the offer.
In addition, buyers with 100% financing who didn’t have enough savings to cover their closing costs discovered that sellers in a seller’s market would not agree to help with these costs. As there were many buyers interested in the same property, sellers usually chose full offers and higher bids that promised fewer if any costs to them.
In the current transitional market, prices remain high with only some dropping off in Orange County and around Los Angeles . Consequently, more comps are available depending on recent area sales of the type of property in question. The appraisal is more likely to support the agreed price, giving the 100% financed buyer more of a foothold in the market.
If the property is priced low, there may still be multiple offers. However, if it is a higher priced property and some time has passed since the listing date without a viable offer, the seller may be willing to help out with closing costs. The buyer may then add the closing cost to the list price and ask for the difference back at close of escrow. This strategy can work provided that 1) the property appraises for the combined total, and 2) the amount requested from the seller is not more than 6% of the list price. As you can see, these guidelines are very narrow, so another offer of equal or greater value with more cash is likely to find acceptance first. If there aren't other offers, the buyer can't go above a certain point, and the seller is running out of time, he or she may be willing to give closing costs without stacking. In this case, the seller will be less likely to make any repairs beyond those needed for the loan to fund.
What are interest-only mortgage payments?
If someone gets an interest-only payment, that person can get “more house” for a smaller payment, but he or she needs to understand that the principle is going unpaid. This type of payment can be a boon to young, first-time buyers who will be earning more in a few years and who will able to make bigger payments in the future. It’s a way of letting such buyers play catch-up. And think about it, by the time they are earning more money, houses will cost even more, so their friends who decided to wait might still not be able to afford a home a traditional mortgage payment with their increased earnings.
Investors also benefit from interest only payments since they acquire greater leverage, putting less of their money into a property and reaping a bigger profit. This strategy works if area prices are rising and allow the investor to sell high after a couple of years. Think about it, if an investor buys at $300,000 and puts in $2500 a month into a property instead of $1500. When he or she sells it after 2 years for $400,000, the profit will be effectively $24,000 less. Of course, the idea is to invest that $1000 a month elsewhere, meaning that if the investor doesn’t do so, the profit loss will be 2% to 10% or even higher.
Of course, investors always take a chance that the market will go down, but if they don’t assume that they will always profit immediately and are prepared to readjust and hang on until prices are higher, they will eventually be successful. One thing that real estate has over stocks is that the item bought is readily tangible, being an actual place. If it can be lived in, it will have rental value.
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