An Email to a Client About Buying and Selling in Our Slow Market

My clients, who want to buy and sell a new home, asked me if it were better to act now or wait until spring.  Ultimately, as I'm not omniscient, there is no 'right' answer to give. But this is how I view it - a 'bird in the hand' approach.   This email was a couple of weeks ago.  My clients, in the meantime, also spoke to their lender and we're going to ask the seller to pay the costs for a temporary 2-1 buydown. (Buyers cannot pay for temporary buydowns though they can pay for permanent rate buydowns.)  Very briefly, a 2-1 buydown takes the nominal rate, say 7.5% and drops the rate by 2 points the first year and 1 point the second year.  So -   Year 1: 5.5% Year 2: 6.5% Year 3: 7.5% (the full rate)   The idea here is that the rates will drop enough in the next couple of years so that refinancing makes sense. If rates don't drop, then you're still doing as well as or better than the market. There is, of course, more to know about buydowns but let this suffice for the moment.   Enough backstory.  Here's the email:   Listing in the spring could make a difference - of course, it's impossible to speak to the future.  And it's particularly hard lately because we've had such strange markets in the last few years, so stats aren't always following normal patterns.  What follows are my thoughts - I could be right or wrong - but it's how I would make a decision for myself. (That's my official disclaimer!)   Here are the things to consider:   Interest rates: where will they be?  Right now - today - they are the highest they have been in decades. They have been climbing all month (despite the fact that the Fed did not raise the rate at their September meeting).  The Fed has indicated - but remember they're only making their best guess - that they will raise the rate a couple of more times.  The goal of leaving rates be in September was to let the economy 'catch up' to see the effect of past adjustments.  This will help the Fed decide on future increases/not-increases.  The Fed raises the rates to fight inflation.  Their goal is 2%. Last week the PCE was at 4%, so future increases seem likely unless that inflation number chills out.   But the rates could come down by spring.  They will eventually. But when and how far is impossible to say.  There is talk of rates coming down and there is also talk of them hitting 8%.  Regardless of buying now or in spring, you'll probably be in a position such that you'll be refinancing down the road.   That said, if the rates come down, it will obviously help on your purchase.  It will also make the market more competitive. Spring is more competitive than fall already; if rates decrease, it will bring a lot of potential buyers, now on the sidelines, back to the market.  So potentially-more-palatable payments come with increased competition.   Spring, again, is a busier time than fall.  So as a seller, you will have more competition as well because there will almost certainly be more homes on the market.   The good thing about spring is that prices tend to rise, so you can get more for your house. The bad thing about spring is that prices tend to rise, so you will pay more for your new house.     You are buying and selling in the same market and you are buying ‘up’, i.e. more expensive.  Let's say the values today are: $430K sales price and $580K purchase price. Let's also say the market increases by 5% from now to spring (totally made up for the example's sake). You will get $21,500 more on the sale of your house and you will spend $29,000 more for your new house.  So a net loss of $7,500.  Buying and selling in the same market neutralizes or worsens the effects if you're 'buying up', as you are.   Conclusion   I have been telling folks to buy now because:   competition is scarcer, giving you greater odds of success on the house you find (fewer bidding wars);   the rates can do three things - go up, go down, stay the same.  If they go down (far enough), you refi; if they stay the same, who cares?, if they go up, bummer for you.  A refinance costs but, meanwhile, you're in the house you want and enjoying it.  Even if you wait until spring and the rates have decreased, they're unlikely to have reached the new lows of the next downcycle, so you're probably going to refinance eventually, anyhow.  So the refi cost is in your future, either way.   I would guess that one of your concerns is taking a loss on the sale of your house.  However, remember #4.  And extend it out.  If your house is worth $430K and you wait until it's $500K - a 14% increase but no loss - the house that was $580K is now $661,200.  In pure numbers,  you've made $70,000 but lost $81,200.  So a loss on your sale is actually a gain in the bigger picture.  To put it another way, if you buy the more expensive house now, you're collecting the 14% (or whatever the number is) increase in equity on a bigger number.  

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Oregon Property Taxes

Green and Yellow - Tax a Fellow   It’s Oregon Property Tax Time and… I’m conjuring up mental images… your bill is either green or… wait, it’s coming to me…  yellow!  You may not have realized there were two colors (since you only see one tax bill at a time) and that these colors have significance.  If your bill is green, think, “Go!”, as in go get your checkbook or debit card and pay the county. (See Oregon Property Tax Rules, below, for more on this.) If your bill is yellow, slow down!  Someone else – most likely your mortgage loan servicer – is paying the bill. This is not an act of benevolence on their part, by the way. A portion of each monthly mortgage payment you’ve made has been saved in an escrow account.  These monthly contributions are timed to accumulate to cover your taxes and/or insurance when they come due. (If you receive a green bill but your mortgage servicer is deducting monthly payments, make sure to get to the bottom of this.  Clerical errors can occur.  For example, if your servicer changed, a mistake could have occurred.  It’s up to you to follow up with the servicer and county to make sure that all is well.) Interesting fact: a loan servicer will sometimes write one big check to a county to cover the combined tax bill for all its clients in one fell swoop. Oregon Property Tax Rules State law requires all Oregon property tax bills be sent out by October 25. Once received, you have three payment options, all with a November 15th first payment: If you pay the entire bill on November 15th, you receive a 3% discount. If you pay 2/3 of the bill on this date, you receive a 2% discount. The remaining 1/3 is due by May 15th. Your final option is to pay 1/3 on November 15, 1/3 on February 15th, and the final 1/3 on May 15th. Of course, if your mortgage loan servicer is paying the bill, you don’t need to worry about these dates.  If anyone asks, just tell them that ‘your people’ are seeing to it.

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The Life of an Escrow Infographic

The Life of an Escrow infographic.   

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Discount Points and Origination Points – A Pointed Discussion

In the real estate world, there’s a lot of talk about discount points and origination points.  Though both a part of closing a real estate loan, their functions are different.  So let’s discuss these pesky customers. Where to start with points?  There are two definitions: (1) the underlying mathematical definition which applies to anything (real estate or not) that involves percentages, and (2) points as they are used when speaking of loans Mathematical: When we say ‘point’, ‘percentage point’ is implied – English has just dropped the word ‘percentage’ off of the phrase.  However – pay attention here… this is the hard part – a point is the same as a percentage point but it is not the same as a percentage. This can be confusing (even to people who should know the difference).  Maybe this will help:   Percent #1: 2% Percent #2: 8% Percentage Point, or simply Point, Difference: 6 Points (2 + 6 = 8) Percentage Difference: 400% (Percent 2 is 4 times bigger than Percent 1, or 400% bigger).   The second definition of ‘point’ applies to discount points and origination points.   Origination points are fees charged by lenders for processing the loan.  If a buyer has a $300,000 loan and the lender is charging .5% in origination points, the buyer is paying the lender $1,500 for its services (one point on $300,000 would be $3,000, so ½ point would be $1,500). Discount points, on the other hand, are used to lower (or ‘buy down’) the rate (think of it as pre-paid interest, if that helps).  This reduction in rate can be temporary (e.g. 2 or 3 years), or for the life of the loan. As an example, the buyer pays one discount point and the interest rate is lowered by ¼ of a point.  So, if the loan amount is $400,000 he would pay one point, or $4,000, to lower the interest rate ¼ of a point, say from 6% to 5.75%.  All points are paid up front before the loan closes.  When a buyer signs paperwork for his loan, he will be asked to bring in a check for a certain amount.  This check will cover all that he owes, including down payment, closing costs (which include the discount and origination points), property taxes, hazard insurance, and any other charges.  So all points are paid at the beginning of the loan.   Bonus Material!  Exciting! Though less common to see, there is also a ‘basis point’.  A basis point is 1/100th of one point (or, if you want to really confuse people… a point of a point).  Basis points are commonly mentioned in the world of finance (all finance, not just real estate finance).  As a quick instance, someone might say, ‘the rate just went up 20 basis points’, meaning it went up 2/10 of a percentage point, say from 5.20 to 5.40. 

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10 Real Estate Terms You Should Know

10 Real Estate Terms You Should Know Below, find 10 real estate terms that you should know and keep an eye out in the future as I continue to add more and more.  My goal is to make these easily understandable to novices to real estate as well as to help clear up and go a little deeper on the definitions for the more knowledgeable.   Appraisal (see Inspection) – an appraisal is an opinion of the value of a property by someone who is trained and licensed as a professional appraiser.  The type of appraisal (cost, income capitalization, or sales comparison) is dependent on the type of property (owner-occupied or investment, residential or commercial, etc.).  Note that appraisals are opinions – an appraised value can differ greatly from the final sales price and the initial agreed-upon offer price is not typically informed by the appraised value.  The appraised value, however, can affect the loan which, in turn, can instigate negotiations.  Appraisals are most commonly used in transactions in which the buyer is borrowing money.  The lender must verify that the collateral (the property) for the loan will protect the lender’s interests in the case of default. The purpose of an appraisal and an inspection are often confused.  An appraisal (often required) is to establish value; an inspection (usually voluntary) is to give the house a once-over to make sure it’s not about to fall down around the new owner.  While appraisers will point out obvious flaws (“Hey, there’s a hole in the roof” or “Look, a nest of termites in the living room”), you probably won’t find the appraiser in the crawl space as frequently as the inspector. Bumpable – the definition can vary regionally, usually depending on what MLS (Multiple Listing Service) area you’re in.  A Bumpable Sale in the Portland market is a house that has an accepted but contingent offer on it (see Pending), meaning that the buyers are waiting to sell their own house before they can close on the one they want to buy.  So, although there is an accepted contract, if another offer comes along, the seller is in her rights to accept it, ‘bumping’ the old buyer out of line. (There’s a bit more to it than that, but that’s it in a nutshell.) Buy-down (Rate Buy-down, Mortgage Buy-down) – (percentage) points paid to a lender to lower the interest rate, and therefore the monthly payment, on a loan.  These points can usually be paid by either the buyer or the seller.  There are different kinds of buy-downs: some lower the rate for the entire term of the loan, some temporarily (e.g. the first two or three years, after which the full rate goes into effect for the remainder of the loan). Concessions (Seller Concessions) – benefits afforded by a seller to a buyer to bring about a sale.  Examples would be when a seller pays some or all of the buyer’s closing costs or pays to buy down a buyer’s rate. (See Buy-down). Contingent – requiring certain conditions be met before a sale can finalize.  Although it can refer to many required conditions – some examples would include the home inspection or approval of the buyer’s financing – when one hears about a ‘contingent offer’, it usually means that the buyer in the transaction requires his own property to sell before he can close on the property he’s buying (usually because he doesn’t have enough money without the proceeds from his own sale). Debt-to-Income (DTI) – a definition used by lenders to calculate how much of one’s gross monthly income goes toward debt.  Debt here is usually defined by a lender as what is found on a credit report (credit cards, cars, student loans) as well as child support, alimony or other fixed monthly obligations.  Items such as groceries or utilities are not included in the ratio.  Loan programs often have guidelines for maximum debt-to-income ratios. (For more on this subject please read “What is DTI & Why do I Care?”.) Due Diligence (Feasibility) Period – a period, usually after mutual acceptance of a purchase contract, allowing the buyer to inspect and research the property he is buying.  The terms of what is allowed in this period are subject to the contract’s terms.  As an example, a seller has accepted a developer’s offer on a piece of land.  His due diligence might include, usually at his own cost, talking to the local jurisdiction about allowable uses for this piece of land and if he’ll be required to put in sidewalks.  In addition, he is having the well inspected to make sure the water is good and the well works.  Allowable testing and inspections are usually spelled out in the contract (particularly invasive inspections), so a well inspection is probably fine while dynamiting a hillside to check the water table is probably not (unless the seller has agreed to it). Earnest Money – earnest money is a good faith deposit paid by a property buyer, usually to a neutral 3rd party such as an escrow company, to show that she is an earnest buyer.  If buyer does not perform on the purchase contract, she stands to forfeit this deposit to the seller.  It is, in a phrase, putting one’s money where one’s mouth is. Inspection (see Appraisal) – inspections are part of the due diligence process when buying a home.  Typically voluntary and paid for by the buyer (not always, mind you), an inspection is the ‘kicking the tires’ on one’s potential new digs.  There are full-home inspections as well as countless types of specific inpsections, depending on how much of a worry-wart the buyer is and also what is needed in certain regions.  For example, in the Portland, Oregon area, radon and sewer line inspections are very common while termite inspections are not. But if one is looking in Florida, a termite test is probably advised. Pending – the definition can vary regionally, usually depending on what MLS (Multiple Listing Service) area you’re in.  A Pending Sale in the Portland market is a house that has an accepted, non-contingent offer on it (see Bumpable).  There can be other conditions to the contract but none that requires the sale of real estate. OCTOBER’S SUPER FUN BONUS WORD! Chattel – personal property as opposed to real property. (Real property is another way to say real estate.)  In the 13th Century, ‘chatel’ referred to all property. By the 14th Century it had come to refer mostly to livestock. Finally, in the late 16th Century, it came to refer specifically to cows and bulls. The meaning was essentially property/wealth that could be moved (at the time, a significant amount of people's wealth was in their livestock and cattle) versus property/wealth that could not be moved – i.e. real estate.  Had Hemingway written a book about chattel, perhaps he would have titled it A Moveable Beast.

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What is DTI & Why do I Care?

The first step in buying a house is to get pre-qualified for a mortgage.  Without this, the process won't go far - few agents will work with you until you've been pre-qualified and few sellers will accept your offers if you’re not pre-qualified.  For your own sake, pre-qualification also lets you know how much house you can buy and what it will cost you each month.  (For the sake of this article, ‘pre-qualified’ and ‘pre-approved’ are the same thing.) To determine if it wants to loan you a whole lot of money, the bank is going to take a very in-depth look at your finances and credit.  It may seem invasive and annoying and sometimes the bank will ask for the same things multiple times.  But they're the proverbial elephant in the room and if you simply furnish what they request, you'll save yourself some unproductive stress.  (And, in all fairness, if you were loaning someone hundreds of thousands of dollars, you'd probably be pretty careful as well!) All of this stuff that the bank is going to ask for basically falls within "The 4 C's" (a clever, clever name, as what follows will show you): your Credit, your Collateral, your Capital, and your Capacity.  (We'll get into all of the "C's" in future blog posts - all four are, after all, inextricably interrelated and each deserves its time in the limelight.)  For today, we're going to talk about Capacity.  Capacity describes your ability to repay a loan to the bank. And this is where DTI finally enters the story.  We're going to discuss Capacity in terms of your DTI.  Your DTI is your debt-to-income ratio (a.k.a. 'debt ratio'), that is, your monthly debt divided by your monthly gross income.  The lower your debt ratio, the more likely you are, statistically, to make your monthly payments and to make them on time.  So banks like lower DTI's. Every loan has guidelines and within these guidelines will be the maximum debt ratios.  But to make things confusing, most banks' debt ratios aren't written in stone.  For example, a high credit score, substantial savings, or a large down payment are 'compensating factors'; with these, the bank may allow a higher debt-to-income ratio.  Conversely if you have no savings and a dicey credit score or history, there may not be a lot of stretch allowed.  Many - dare I  boldly say, most - loan submissions are analyzed by a computer nowadays.  So the data is entered and the computer spits out an approval or denial.  The computer uses an algorithm, meaning there are no hard-and-fast rules... the computer looks at the overall picture, including DTI, credit score, down payment, income, et al., and says 'Yea' or 'Nay'. There are 2 DTI ratios: the front-end debt ratio and the back-end debt ratio.  The front-end ratio is known as your "housing ratio" which considers your proposed monthly housing payment as it relates to your income.  The back-end ratio includes not only your proposed housing expenses but also your consumer debt payments.  Know that both ratios exist but we will be discussing the back-end ratio from here on out, just to keep things simple.  The math principles, compensating factors, and so on, work the same way for both ratios. The I in DTI In all cases, the income used is your gross income, i.e. your income before all of those pesky things like taxes, et cetera, are removed.  Income’s more straightforward than… The D in DTI So let's talk about the D, also known as your debt.  To calculate your back-end ratio, we need your (proposed) monthly housing debt and your (current) monthly consumer debt. By proposed monthly housing debt, I mean that the bank is going to use the payments on a house that you don’t actually own yet – the hypothetical payment on a new home.   Your housing debt is made up of the following: Your projected monthly principal and interest payment, Your projected property tax payment, Your projected homeowner’s insurance payment, Your projected homeowner’s association (HOA) dues.   Your consumer debt is, generally-speaking, everything listed on your credit report (that has a monthly payment at the time of the report) and sometimes other things (court-ordered payments, for example).  The bank isn't going to ask about your water bill or how much you spend on groceries. We're talking about car payments, boat payments, credit cards, student loans (there are often special rules around student loans, by the way), and probably alimony and child support... Now that we’ve got some definitions, let's look at the example below. Your gross income is $96,000 per year.  We divide that by the twelve months of the year to come up with a monthly income of $8,000.  So far, so good. The monthly payment on your proposed house will be: your loan amount (principal plus interest) of $1,750/month, your property taxes of $215 per month, your homeowner's insurance of $79/month, and you have a monthly HOA payment of $60 (this goes to maintain the rec room and common areas, like the greenspace for dogs).    Total proposed housing payment: $1,750 + $215 + $79 + $60 = $2,104/month. In addition you have a car payment of $348/month, a credit card with a payment of $39/month, and a child support payment of $376/month.  Total non-housing debt is $348 + $39 + $376 = $763/month. Your total monthly housing debt payment plus consumer/other monthly debt payment is: $2,104 + $763 = $2,867/month. Now, for the DTI.  Simply divide the total debt by the income which leads us to a ratio (a percentage).  So, in our example, your total debt divided by your gross income:  $2,867 / $8,000 = 35.8% back-end debt ratio.  This is a reasonable debt ratio and will satisfy most loan program guidelines. But now let's throw a boat in.  Not literally - boats are quite heavy. You decided, last June, that a boat was a good thing to have.  But you didn’t have the cash so you financed it.  The payments are (ouch!) $1,100/month.  With this additional debt, your total, combined debt is $3,967/month ($2,867 from before plus $1,100 for the boat).  Now we divide the new total debt payment by the same income:  $3,967/$8,000.  Your new debt ratio is 49.6%. While it's possible to have a back-end debt ratio near (or even above) 50% (in some loan programs though not all), this is where you get into the compensating factors we discussed earlier.  If you have strong credit and 30% down, you're much more likely to qualify for this loan with a 49.6% back-end debt ratio than someone who has had late payments and has a down payment of only 5%.  And there you have it!  A debt-to-income ratio.  It’s a thrill-a-minute concept!   But wait!  There’s one more thing… The bank says you’re just fine getting this loan.  But, guess what?  That’s not the bank’s decision.  While you can’t really go higher than the bank says (unless you have a stockpile of cash), you can certainly go lower. Once you’ve established what the bank’s maximum is, sit down and figure out what your maximum is.  Remember that the price of the home you’ve been pre-qualified for is unimportant… you’re buying the monthly payment.  And you don’t want to get tied to a loan that you can’t or don’t want to pay every month.  It’s not necessarily easy or inexpensive to get out of a real estate loan quickly. So, contrary to popular belief, it's not always the case that just because you can buy a house for a certain amount that you should buy that house.  It’s important that you agree with the bank’s judgement of what’s affordable. The question of whether you’re OK with a certain payment is ultimately up to you.   

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Robert's 10 Commandments for Home Buyers

I THOU SHALT NOT CHANGE YOUR JOB, QUIT YOUR JOB, OR BECOME SELF-EMPLOYED. II THOU SHALT NOT BUY A CAR, TRUCK, OR VAN (OR YOU MAY BE LIVING IN IT!). III THOU SHALT NOT USE CREDIT CARDS EXCESSIVELY OR LET CURRENT ACCOUNTS FALL BEHIND. IV THOU SHALT NOT SPEND MONEY THAT YOU HAVE SET ASIDE FOR HOUSE. V THOU SHALT NOT OMIT DEBTS OR LIABILITIES FROM YOUR LOAN APPLICATION. VI THOU SHALT NOT BUY FURNITURE OR DECORATIONS OR CURTAINS (OR ANY OTHER FUN STUFF FOR YOUR NEW HOUSE) ON CREDIT. VII THOU SHALT NOT OPEN A NEW CREDIT LINE OF ANY KIND NOR ORIGINATE ANY INQUIRIES INTO YOUR CREDIT. VIII THOU SHALT NOT MAKE LARGE DEPOSITS NOR TAKE LARGE WITHDRAWALS WITHOUT CHECKING WITH YOUR LOAN OFFICER. IX THOU SHALT NOT CHANGE BANK ACCOUNTS NOR TRANSFER LARGE FUNDS WITHOUT CHECKING WITH LOAN OFFICER. X THOU SHALT NOT CO-SIGN A LOAN FOR ANYONE.

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