FINANCING FICTION

Myths and misconceptions create some of the greatest barriers among would-be homebuyers. As a real estate agent, this is where your expertise becomes particularly crucial. Erroneous information abounds in virtually every aspect of the homebuying process, but the most harmful are those that involve money.

One of the biggest misconceptions, and one that we encounter frequently with our clients, is the idea that a down payment must be at least 20 percent of the purchase price. Unfortunately, this number frightens away many buyers who in actuality would qualify for a mortgage. The reality is that, in most cases, the minimum required for a down payment for a primary residence is only 3 percent!

In addition, there are many programs designed to assist with the down payment, the problem is most people aren’t aware of these.

For example, there are several down payment assistance programs that make funds available to buyers that cover all or part of that minimum 3 percent down payment. These come in the form of a grant or a “forgivable” second mortgage. These programs are typically geared toward the first-time homebuyer; however, some are available to anyone.

SEPARATING FACTS FROM FICTION

If your client thinks this sounds “too good to be true,” rest assured they are regular, government backed, non-subprime loans. Furthermore, these programs are available through both conventional and FHA financing. The bottom-line is that it is possible to buy a home using one of these down payment assistance programs with virtually no out-of-pocket money for the buyer.

Other programs feature loans with a remarkable 0 percent down payment. Of course, these are more specific to particular groups and have additional requirements the buyer must meet in order to qualify. These include:

VA LOANS

• Exclusively for veterans and their spouses.
• Active duty military may qualify depending on time served.
• 100 percent financing with 0 percent required down payment.

USDA LOANS

• Offered through the USDA Rural Housing Development program.
• 100 percent financing with 0 percent required down payment.
• There is one caveat: property must be in a USDA eligible area.

As you can see, there are many loan options available for buyers. Because so many people in the homebuying market have limited information while at the same time are inundated with myths and half-truths, it’s imperative that you are armed with correct and up-to-date information to reassure and guide them through the process.

My team and I are always available to provide accurate information, debunk myths, and even answer your questions regarding specific buyers and transactions. You’ll be a hero to your clients when you take the fear out of home financing and bolster their confidence in their purchase – we can help make that happen!

Let’s look at two families below and how the reverse mortgage provided a solution.

CASE #1

Claudette, 72, was working with her real estate agent Tracie trying to find an acceptable house to downsize into after her husband’s passing. She could no longer manage the upkeep of her home and the mortgage payment was too much. As Tracie searched through the inventory of homes in Claudette’s desired area, it became clear that she would not have enough equity from the sale of her current home to make a cash purchase on a new home. During this process, Tracie attended a reverse mortgage continuing education class hosted by her broker. During this class, Tracie learned more about the product and Claudette came to mind; could this be the solution that could get her into a home that she could afford without compromising the location and quality that she was looking for?

Claudette was encouraged to meet with the local reverse mortgage specialist – also known as a Home Equity Conversion Mortgage (HECM) specialist – who could help her understand how the product worked. She was a bit skeptical and had many questions as she had learned more and more. As she worked through her specific scenario and all the misnomers were answered, it became clear to her that this was her solution.

Tracie was able to find a property within walking distance of Claudette’s friend, which was very important to her. Financially this was the best option Claudette could have imagined. The house she agreed to purchase was priced at $217,900. She was approved for a loan in the amount of $92,900 and brought in the remaining funds of $125,000 to complete the purchase. This enabled her to save $35,000 from the sale of her property and she would not have another mortgage payment on her new home as long as she remained in the home as her primary residence and all other terms of the loan continued to be met.

CASE #2

Bill and Joan had a home that was free and clear of a mortgage. They had enough income to support them through their retirement years, however, like many people, some unexpected expenses came up that changed that. They had a daughter that became disabled and they needed additional money to support her. After attending a class on the reverse mortgage at their local community adult learning center, they scheduled an appointment with the reverse mortgage specialist and completed their required counseling class before continuing on with the application and process of obtaining a reverse refinance on their home.

Bill and Joan were approved for a loan amount of $196,000. Of this amount, they decided to have $20,000 distributed to them at closing to purchase a vehicle. Next, they set up a term payment of $1,000 a month so that for a period of 12 years (the term and dollar amount they selected) they would receive that directly into their bank account. This left them with a line of credit in the amount of $32,000. They were able to now have safe and secure transportation, and the additional monies needed to help care for their daughter.

From these scenarios, one can see how a reverse mortgage may be a great solution for different people at different stages of their lives and for a variety of reasons.

“The function of education is to teach one to think intensively and to think critically. Intelligence plus character – that is the goal of true education.”

– Martin Luther King Jr.

We were recently starting a course one class when a typical question was posed. We receive this question frequently during the opening moments. The question surrounds the real estate exam, the timing of taking the state-required examination to get a real estate license.

As I start to explain the requirements for taking the real estate exam, comments always fly such as “my hiring manager said I should take the exam as quickly as possible after course one,” and “I have been told that courses two and three will confuse me for the exam.”

Learning styles vary from one person to the next. Some people are auditory learners and they learn by hearing and reading. Some people are kinesthetic learners and the learning process is captured by “doing” something. It’s like handing someone a piece of furniture with ‘some assembly required.’ Some people will open the manual, reading it cover to cover before attempting to put it together. Others may sort the screws, cam locks, material and use the picture on the box as the guide to start attempting assembly. Everyone learns differently. In the wake of the flood of information given in a license course, it may be well served to wait until courses two and three are completed. What is taught in theory (course one) is learned in practice (courses two and three). A one-size-fits-all approach is not a good idea.

As far as continuing education goes, the legislature wants to make sure that the person who is claiming credits for the course took the course. In classroom settings, we (the instructors) can see and physically monitor attendance. In online courses, that cannot be achieved except by testing. Several years ago, the law was appended which stated that the classes taken online needed to ‘guarantee seat time’ by eliminating a click-it-forward at your own pace. Theoretically, this would ensure the attendee was taking as much time with the online course as they would have if they took the live course. At the end of every online course, there is an examination which can be taken a certain number of times before a consequence occurs (multiple failures may result in taking the course again or paying for the course another time).

Some feel that the guaranteeing seat time requirement should be eliminated, and some argue that it should be more strictly enforced.

As an instructor of CE over the years, I have seen many things in class during the last days of the CE year (ends June of each year). There are 80 people in a classroom – some listening intently to gleam something of value. Some people, on the other hand, are reading newspapers, tablets and phones while biding time to attain their credits. I will say that the industry has more intent listeners than casual attendees.

I remember the teachers in grade school who told me incessantly to “pay attention.” The required module is one where attention must be paid. The examination at the end of the course must be passed to gain the 3.75 hours of credit. What purpose is served by sleeping through class, working on a listing while the instructor speaks or removing timing from online courses.

The good news for those looking to reach buyers in the months ahead is that, according to new data from Lending Tree, there’s likely to be no shortage of shoppers who plan to get into the market this spring. The Twin Cities in particular are likely to be one of the hottest markets for homebuying competition in the country this spring, ranking 16th nationally.

EXAMINING THE COMPETITION

The Twin Cities’ metro area is home to some 3.55 million people, and those planning to get into the market largely seem set on doing things the right way, in line with what any experienced agent would recommend. More than half of would-be buyers have credit scores that are at least prime, and nearly three in five say they will get preapproval on a mortgage before they hit the market in search of a home. Moreover, the average down payment those shoppers are prepared to put down is significant, at 14 percent.

To that end, agents will be wise to make sure their clients know the importance of improving credit scores and down payment size, so that even as competition heats up – especially among first-time buyers – they will be able to find a deal on a home they want.

FINDING STARTER HOMES

As with many major housing markets that are expected to see big increases in real estate sales activity, the Twin Cities and surrounding region are experiencing a significant lack of lower-priced starter homes that would normally be favored by younger buyers, according to the Minnesota Post. The problems mostly stem from owners not selling – despite plenty of year-over-year home price increases since the end of the recession – and construction firms simply not keeping up with demand.

In addition, the number of would-be buyers with sizable annual salaries getting into the market, who might have previously focused on larger, more expensive homes, are likewise more interested in buying lower-cost homes. They can therefore, afford to make bigger bids on smaller homes, which takes away options for those who want to buy with more modest budgets.

David Arbit, director of research and economics at the Minneapolis Area Association of REALTORS, told the site that most people on the lookout for a first home, to make sure their mortgage payments are in the same range as rent for a two-bedroom apartment in the region. That desire puts most people in the area of being able to spend between $1,200 and $1,600 on a mortgage payment each month. But, when more affluent buyers can swoop in and make larger offers, the supply of homes in that price range becomes more limited.

DIGGING INTO THE NUMBERS

At the end of 2017, the median sales price in and around the Twin Cities had risen sharply on an annual basis, according to the MAAR. Buyers in the area paid a median price of $248,500 in December 2017, up 10 percent from the $226,000 seen at the end of 2016, and sellers were recouping 97 percent of their properties’ list prices, up from 95.9 percent a year earlier.

Meanwhile, the inventory of homes for sale in the region had plummeted from nearly 9,500 to more than 6,800. That change led to a sharp decline in the supply of homes for sale – to just 1.3 months from the previous 1.9 months. New listings were down nearly 5 percent over that period.

With competition heating up, properties put on the market are spending a lot less time up for sale, falling to an average of just 61 days on the market in December 2017. That’s down from 72 at the same time in 2016.

With so much at stake in a home sale these days, it’s vital for agents to ensure their clients are financially protected throughout a sale. When agents make sure a home warranty is included as early into the process as possible, all involved can be insulated against unexpected costs and potentially save large amounts of money. Because of current market conditions, many sellers may feel they don’t have to include a warranty, but it can actually be an attractive selling point and encourage more bidding because of the additional security it can provide if something were to go wrong with an appliance or system in their homes.

There are a lot of factors at work right now to give us a positive outlook about the demand for homeownership and our ability to supply financing for that demand. It would seem it’s a matter of time, patience and preparation.

Let’s talk about demand for homeownership first. A study of current renters showed a clear desire to “own a home at some point” and that is very important. The millennials may be renting today, but 89 percent of them indicated the desire to own a home in the future. The American Dream of homeownership is alive and well and we need to nurture that dream and demonstrate to the millennial and GenX renters that homeownership is not just a dream, but an attainable goal.

Source: Freddie Mac, Study commissioned by NAR “Hurdles to Homeownership: Understanding the Barriers” Kenneth T. Rosen, Rosen Consulting Group

That means we need to focus our conversations with these prospects around the traditional benefits of homeownership they may not have heard clearly to this point in their lives. The tax advantages of homeownership were not impacted by the recent tax bill for the overwhelming majority of individuals, and the long-term ongoing increases in home values continue to demonstrate the value of a home as an investment tool. These prospects have fresh memory of the bubble and housing crisis, but the longer-term trend may not be as evident to this current group of homebuyer prospects and we need to help them see that opportunity.

If we can nurture the dream and demonstrate the value of homeownership then our next hurdle is helping these renters realize they can afford to buy a home.

We can help by investing time and energy getting to know their unique situation and challenges. If it’s a concern about student debt, we may be able to help them with the relatively new Income Based Repayment (IBR) options for student loan debt that can dramatically lower their payment and increase their lending options. Only recently has the mortgage industry changed the ways they view student debt and renegotiated IBR options and those changes can make a dramatic difference in your renter’s homebuying options.

If they have the income but are concerned about the down payment there are a plethora of down payment assistance programs they can tap into, plus accessing the bond loan financing options, USDA and FHA and VA programs all can mitigate down payment concerns. These home shoppers need to sit with experienced real estate agents and loan officers and explore their options.

We should also be prepared to say, “not now” to many of these individuals as well, but offer them a clear path to homeownership. That path may mean a savings plan, an income goal, credit counseling or any other form of advice to help them navigate their hurdles to homeownership.

Finally, we have to address the supply issue with these prospects. Wanting to buy a home is great and uncovering financing options to make the attainable is even better, but we have to prepare them for the reality of a tight listing market. Make sure your home shoppers are fully approved for financing with a reputable lender and a loan officer you trust and that they are not walking around with a simple prequalification letter in their pocket. If you are to win the eventual bidding war on the home they want, you will want them fully approved and ready to close quickly and cleanly. Encourage your shoppers to invest the time and energy to secure a full loan approval based on a thorough review of their income and credit, and to do that before they find the home of their dreams or that dream may remain just that.

We just don’t compete with FSBOs anymore!

For example, Zillow Instant Offers is a program that allows sellers to receive offers from investors along with a CMA from a Zillow agent advertiser.

The NAR is protesting the recent agreement with Fannie Mae and Invitation Homes as it may intensify the housing shortage with rents rising as inventory shrinks. Freddie Mac wants to participate by financing midsize landlords that would also reduce inventory essentially competing against homebuyers.

How can we forget about Offer Pad, Open Door and low-ball offers from investors? Are you too old to remember when it all began with, We Buy Ugly Houses?

Many local brokers are working to establish their own database of inventory that may or may not be exclusive. The market is changing right before our very eyes from just a few years ago. How does one compete in a changing market?

Know Your Strengths

First, remember you can’t be all things to all people. However, we must become proficient at finding sellers or buyers of property.

We always start by defining your strengths and acknowledging the areas needing shoring up. For example, one person’s strengths may be technology, while another person still has an AOL email address. Take a moment to re-assess your core strengths. That is, where are you a rock star? Let’s work with something you love and are talented at instead of trying to be something you are not.

When the sixth grade parent-teacher conferences came for my daughter, Sydni, I was told she excelled at English, writing and literature. Then there was a suggestion that she might need a tutor for science. The teacher said, “We want to bring her grade up so that she is excelling at everything.” To which I thought, “Excel at everything? That’s impossible!”

Can you imagine telling Tiger Woods that he should get a coach to help his free-throw shooting? Tiger is doing just fine in golf. He doesn’t need to waste time at the free-throw line. The same is true with you. Let’s work with your strengths and acknowledge that some areas need shoring up.

In our business model we hired Don as our accountant. Although I am a fan of QuickBooks and have worked within QuickBooks, the real question is, “Should I be doing QuickBooks? Or is my time better spent doing something else?”

Three Strategies to Succeed

If you have ever been on a date, then you understand marketing. If potential clients do not know you exist, you won’t make it past the 24-month threshold of success.

We suggest a three-prong approach to marketing to your ideal client. The first step is to determine our marketing budget. Which then begs the question, “How much is a client worth to you?” Are you a relationship builder or is burn-and-churn your style?

Once we determine how much a client is worth we can determine a reasonable marketing budget to go find that client. Even if a budget is minimal there are many effective ways to promote and create action. One example is working with the local pizza restaurant to staple your call-to-action flyer to their takeout and delivery pizza boxes.

Without accountability and measurement, it is easy to forget about those New Years’ resolutions. Why re-invent the wheel? Find someone who has done it before and hire them to reduce the time to your success. Have quarterly meetings to track last quarter’s goals and set realistic goals moving forward.

Using this three-prong approach ensures your clients and potential clients will see you build credibility as well as branding you and your services. These three simple strategies will continue to keep you productive and prosperous.

Once you become proficient at these strategies, or if you already accomplished them, the remaining pieces are to tweak your marketing.

Low inventory does not have to be an insurmountable obstacle. As with most challenges, a little creative maneuvering can go a long way; or, as the popular catch phrase emphasizes “think outside the box.”

Fixer Upper

Surprisingly, alternative funding is a great place to start. With the scarcity of homes on the market, and how quickly they are selling (many listings receiving multiple offers), I suggest my clients consider setting their sights a little lower or change their approach. Instead of trying to find that “perfect” property, I recommend they look at properties that need work or aren’t quite up to their standards … yet. A renovation loan is the perfect solution, and truthfully if approached with the right attitude, it can be a lot of fun with tremendous rewards.

Custom Not So Costly

Another option, albeit a bit more aggressive, is to purchase a plot of land and build. This might sound like a daunting challenge, but what better way of ensuring they truly end up with the home of their dreams without overpaying for it?

Today, the airwaves and internet are filled with creative and innovative do-it your self ideas. Some of the most popular cable programming features would-be buyers seeking out a property in the neighborhood of their choice, but with considerable work needed. These “fixer-uppers” ultimately prove to be the star of the neighborhood with a bit of money and plenty of elbow grease. The new homeowners have exactly the home they’ve dreamed of, in a community they admire and typically for significantly less financial expenditure than if they had found the home in its renovated condition.

Custom home building has similar if not greater results. Beginning from the ground up, these families can dictate not only the number of bedrooms and baths, but the floor plan and all the personal touches that make a house a home. And again, typically the final property will cost considerably less than if the buyer had purchased it already built.

So Many Options

Unlike the limited choices available in the homebuying market, there are ample options when it comes to selecting a renovation or construction loan. Before discussing these with your clients, be sure to be up-to-date with every aspect. Obviously, these are not the same as a typical mortgage and you should be prepared to clearly convey these differences to your clients.

One of the most frequent concerns applicants have with regards to a renovation loan is whether the appraisal on the property takes into consideration the value of the home once these improvements are completed. The answer is yes! This ensures that the amount available adequately covers the anticipated work. The appraiser gets a list of what renovations will be done from the contractor before he/she does their inspection, so they can assess the after-renovation value

Happy Ending

Much to the surprise and delight of my clients, renovation and construction loans are essentially regular mortgages. They just allow the buyers to bundle the renovation/ construction costs with the acquisition into one mortgage (as opposed to mortgaging the property and then taking out a home equity loan on top of that to pay for repairs). It’s one loan with one rate. Construction loans and renovation loans are one mortgage that each include financing of the repairs/renovation and construction costs respectively.

In my experience, these options have proven to be very successful for those clients who choose this route. A little creative thinking and stepping outside the box can bring delightful results for you and your clients. Rather than be deterred or disappointed with what’s currently available, a renovation or construction loan can open myriad opportunities with wonderful results.

As you shop for a new heating and cooling system for a home, it’s easy to get overwhelmed. Single-stage? Two-stage? Variable speed? The options are plentiful, and the lingo can leave you feeling a bit lost. Given that you’re putting a solid chunk of money on the line, how can you and your clients possibly choose the best system for your homes?