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.
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.
Living in Lake Oswego
Nestled in Clackamas County, Oregon, Lake Oswego stands out with its unique blend of scenic vistas, esteemed educational institutions, and luxury residences. If Lake Oswego is on your radar for a potential move, this comprehensive guide has got you covered. The Lake Oswego Lifestyle: Peace Meets Community Serene and Welcoming Atmosphere In the heart of Lake Oswego, tranquility awaits. This city offers a haven for both families and individuals, radiating a tight-knit community vibe, making it easy for newcomers to integrate and feel at home. Recreational Activities in Lake Oswego Lake Oswego’s Waters: The pristine lake isn’t just the city's namesake; it's a hub for activities. From boating to beach lounging, it's all here in Lake Oswego. Dive deeper into lake activities here. Parks and Trails: Lake Oswego is dotted with parks ideal for picnics, hiking, or cycling. Lake Oswego: A Cultural Epicenter Art enthusiasts will appreciate Lake Oswego for its myriad galleries and museums that celebrate local talent. Explore Lake Oswego’s cultural treasures here. Discover Lake Oswego's Varied Neighborhoods First Addition: Lake Oswego takes pride in this historical enclave, characterized by its vintage charm and picturesque streets. Hallinan: For those seeking serenity in Lake Oswego, this area, with its abundant green spaces, is a top pick. Other Neighborhood Gems: From Mountain Park to Westlake, Lake Oswego has a neighborhood for everyone. Delve into Lake Oswego’s neighborhoods here. Making Lake Oswego Your Home: Tips for New Residents Financial Aspects: Lake Oswego boasts a refined lifestyle, reflected in its real estate prices that are notably above the US average. Top-notch Facilities: Lake Oswego justifies its premium living costs with superior amenities, from elite schools to safety, ensuring an enhanced quality of life. Finding the Right Lake Oswego Home: Enlisting a local Lake Oswego realtor can simplify your home search. Connect with a Lake Oswego property expert here. Activities to Engage in Lake Oswego Lake Oswego Farmers Market: Emblematic of the city’s spirit, this market, running from May to October, offers the best in local produce and handcrafted items. Know more about Lake Oswego market schedules here. Festive Vibes: Events like the Lake Oswego Festival of the Arts keep the community spirit alive throughout the year. Savoring Lake Oswego's Culinary Delights Upscale Dining in Lake Oswego: Gubanc's Pub and Nicoletta's Table stand out as Lake Oswego dining stalwarts. Relaxed Bites: For a casual culinary journey in Lake Oswego, locales like Stickmen Brewery & Skewery are a must-visit. Sample more Lake Oswego eateries here. Lake Oswego is more than just a city; it's an experience. Offering everything from stunning landscapes to a warm community spirit, Lake Oswego promises a fulfilling lifestyle. As you mull over the decision to relocate here, lean on a Lake Oswego real estate specialist to streamline the process. With so much on offer, Lake Oswego beckons you to explore its riches.
Why Your Portland-Area Home isn't Selling as Fast as You'd Like
VIDEO! Do rising foreclosures mean a crash?
There's been a lot of talk for a year or so about the troubles with the real estate market: the crash is coming, it's 2008 all over again... oh my! Here's one minute of thought on that subject.
The Life of an Escrow Infographic
The Life of an Escrow infographic.
What's the Minimum Amount I Need to Buy A House?
We’re going to discuss the costs a homebuyer faces and what options exist to bring in the minimum amount of money when you buy a house. I’m going to talk about the down payment, inspections, earnest money, and closing costs. A couple of the items are pretty straightforward but a couple of others are usually a bit more confusing for folks so we’ll try to get past that confusion. At the end, I have a couple of examples in both written and spreadsheet form. Please keep in mind that the thrust of this article is to answer the question, “How much money do I need to buy a house?” With ‘need’ in this question, it’s my goal to explain what the minimum potential investment is. There are other sides to all of these points that aren’t our focus today. As an example, in the discussion of the down payment: the advantage of a small down payment is that it’s the least money out of pocket (what we’re looking for in this article); the disadvantage is that the less money down, the bigger the loan, and so the higher the payment. A bigger down payment can sometimes improve your rate, as well. Down Payment Long gone are the days of needing 20% as a down payment. In fact, in many areas of the country, a 20% down payment would mean that very few first-time homebuyers would ever become first-time homebuyers. 20% down is a prohibitively big number for most folks who aren’t using equity from a previous home. There are many programs that allow very little – in some cases zero – down payment on a primary residence. Three of the ‘biggies’ that you may have heard of are VA, FHA, and USDA. These three are all legitimate, government-backed programs from way back (FHA was started in the 1930’s, during the Great Depression). There are many other programs as well – some universal and some specific to certain banks. You are unique and your loan officer will let you know what programs you qualify for. But these programs mentioned are not ‘difficult’ to qualify for – as a matter-of-fact, they can be easier in some respects. FHA has insured over 40 million loans since its inception. And, in 2020, 83.1% of FHA borrowers were first-timers. Synopsis of ‘Down Payment’ Minimum money needed for a loan: 0% to 3.5% of purchase price. Money to Hire Real Estate Agent Good news! As a buyer, you typically don’t pay the real estate agent… the seller does. So you can just toss that worry right into the rubbish bin, right now. Synopsis of ‘Money to Hire Agent’ Zero. Inspections When you buy a home, it is prudent to have the house inspected (inspections are your choice and can be waived but this is usually a bad idea). Usually a buyer will want a whole-house inspection and a few ancillary inspections (e.g. a sewer line inspection or a termite inspection). Inspections vary regionally of course: termites, for example, don’t dine in all parts of the country. Customs are also regional. In the Portland, Oregon market, the buyer typically pays for the inspections at the time they are performed (usually shortly after mutual acceptance of an offer). There are other areas where the seller generally has the inspection(s) done ahead of time. Your agent will know how this works in your area. If you live in an area where the buyer pays for the inspections, this will be money that you, as the buyer, will need to have readily available. This amount will vary. As mentioned, in my local market, typical inspections might include a whole-house inspection, a sewer line inspection, and a radon inspection. The total for all three of these might be from $700 to $800. (Details about inspections are outside of our topic: your agent is the best source of inspection needs and costs). Synopsis of ‘Inspections’ Minimum money needed for inspections: $0.00 to $2,000, typically (highly dependent on your area and the inspections needed). For Portland, Oregon, I would recommend budgeting $1,000 for a typical house and transaction. We’ve covered agent fees, down payments, and inspections. The next two items we will discuss are closing costs and earnest money. These usually cause a bit more confusion. Buyer’s Closing Costs In a real estate transaction, there are always closing costs for both the buyer and the seller. Closing costs pay for escrow, title, attorneys, taxes, insurance, lender fees, broker fees, et cetera. When buyers don’t have enough cash on hand to cover their closing costs and down payment, most loan programs will allow the seller to pay for the buyer’s closing costs up to a certain amount (depending on the loan program). When a seller pays the buyer’s closing costs, that amount is taken from the seller’s proceeds – so if the seller would have received $20,000 upon sale but agrees to pay $5,000 in buyer’s closing costs, the seller will now receive only $15,000. Why would a seller pay the buyer’s closing costs? There are a couple of reasons. First, the seller wants to sell! If an offer makes sense, the seller wants to try to work with the buyer to put the deal together. Second – and this is the part that confuses folks at first – the seller can still net the same amount on her sale while paying the buyer’s closing costs and reducing the buyer’s up-front cash needs. Let’s use an example: Sally Seller is asking $250,000 for her house. Boris Buyer wants the house and has enough for the down payment that his loan requires. But the closing costs are an additional $8,000 which Boris does not have. Sally Seller is not willing to accept less than $250,000. If Boris asks her to pay the $8,000 of his closing costs, she would, in effect, be accepting $250,000 minus $8,000, or $242,000. She’s not willing to accept $242,000 and Boris doesn’t have the $8,000. So, the deal’s off, right? Maybe not. Boris and his agent, both clever negotiators, decide to offer $258,000… $8,000 more than Sally is asking. But they ask Sally to pay the $8,000 in closing costs, out of her proceeds. So Sally will now net $250,000 (the $258,000 minus $8,000). She gets the $250,000 she wants and Boris doesn’t have to come up with $8,000 in up-front cash. A happy ending for all! What just happened? Let’s examine it in more detail, including a little backstory. Boris went to Lindsay Lender at The Loan Lair and was pre-approved to buy a home for a maximum of $260,000. Boris’s down payment requirement for his loan was 3.5% of the purchase price. So, if Boris buys a house for the pre-approval maximum of $260,000, this means a $9,100 down payment. His agent, who I’ll call Rob Realtor (convenient, I know) has informed Boris that the inspections will be $900. $9,100 down payment plus $900 inspections totals $10,000. Boris has $12,000 set aside for all of his home buying expenses. After the down payment and inspections, Boris would have $2,000 left. Boris knows that his closing costs are going to be substantially more than that $2,000. So Boris, Lindsay Lender, and Rob Realtor discuss it and decide to ask the seller (once Boris finds a house) to pay Boris’s closing costs. This also leaves the $2,000 – enough for Boris to buy a new dining room table and the Toro Personal Pace Auto-Drive lawn mower he’s had his eye on. Boris sees Sally’s house and falls in love with it – time to write an offer! Rob Realtor talks to Sally’s agent – there are apparently a few other offers circling. Sally Seller is in a strong position because of the potential multiple offers. Rob Realtor and Boris feel they must offer full price to be competitive, so Boris offers $258,000 with the seller paying $8,000 in closing costs. This will net Sally her full $250,000 price and take care of Boris’s closing costs, all in one move. Sally accepts the offer – they have a deal! So Sally is paying the closing costs, right? On paper, it shows Sally paying the $8,000 closing costs… but is she really? In effect, she is not. Boris is ultimately paying the $8,000 because he has increased the amount of the loan by $8,000 rather than pay with cash up front. To put this another way, if Boris had had an additional $8,000 cash in the bank, he would have had enough cash to pay the full $250,000 purchase price plus $8,000 in closing costs, for a total of $258,000. Because he did not have that additional $8,000 in the bank, however, Boris bought the house for the ‘bumped-up’ price of $258,000 but with $0.00 in closing costs, also for a total of $258,000. It was the same amount, either way. Buying the house using this bumped-up price allowed Boris to get into the house without having to come up with the cash for the closing costs. If he hadn’t been able to do this, he would have had to wait long enough to save up an additional $8,000! In the end, how you choose to look at who’s paying the closing costs is up to you. When they’re rolled into the transaction rather than paid in cash by the buyer, then – technically and on paper – the seller is paying the buyer’s closing costs. From a more pragmatic standpoint, if the purchase price is being increased to do this, one could say it’s the buyer paying them. Rivetingly interesting though that discussion may be, the important point is that the buyer doesn’t need to come up with the smackeroos. Synopsis of ‘Buyer’s Closing Costs’ Minimum money for Buyer’s closing costs: $0.00, if seller is paying all of buyer’s closing costs. Closing costs (obviously) can go up from there, dependent on time of year (because of property tax payment cycles), purchase price, etc. Earnest Money Earnest money is a sum that you deposit to demonstrate – by putting money on the line – that you’re a serious buyer. Earnest money, in my area, is typically 1% of the purchase price. This is a ‘norm’, not a requirement or a law – ultimately it is the seller’s decision. If the seller is willing to accept $0.00 in earnest money, then so much the better – but most sellers probably will not. If there is earnest money, you, as the buyer, will usually be required to produce it within a few days of the acceptance of your offer. Unlike with closing costs, there aren’t ways around this. Unless the seller has agreed to accept zero earnest money, you’ll have to come up with this money in the short term and it will be tied up until you’ve closed the transaction. Depending on how your purchase is structured, one of three things will happen to the earnest money at the close of the transaction: you’ll get it all back, you’ll get some of it back, or it will all be credited to any costs you have in the transaction, i.e. down payment and any closing costs you, the buyer, are paying. It is possible to have a transaction where you pay no down payment and no closing costs. If this is the case, your earnest money will be returned to you after closing. (There is a misconception that earnest money is ‘just extra’ that goes to the seller – it does not. It is credited to your side of the balance sheet. If the earnest money is more than what is owed, it will be given back to you.) At the very end of the transaction, the closer (usually a title / escrow company or an attorney) will crunch the numbers to come up with the total owed by you (or not, as the case may be) as a buyer. This total will be equal to your closing costs plus your down payment. Next, your earnest money will be credited to this total and you will pay (by cashier’s check or by electronic wire) the remainder. So, keeping the numbers simple, let’s look at an example where the down payment is $10,000 and you are paying your own buyer’s closing costs of $7,000, for a grand total of $17,000. (In reality, the closing costs will be a messy number, like $7,123.47). $17,000 is the total amount you owe to the transaction to make it close. If, at the beginning of the transaction, you had deposited $5,000 earnest money, it would be credited and you would pay the remainder. $10,000 down payment + $7,000 closing costs = $17,000. $17,000 - $5,000 earnest money = $12,000. (In other words, you’ll bring a check for $12,000 to the closing table). In another example, where you have zero down payment (100% financing) and the seller is paying all of your closing costs, you will receive a check or wire back for the amount of your earnest money. $0.00 down payment + $0.00 closing costs - $5,000 earnest money = -$5,000. (If the number is negative, it is coming back to you!) The next section will go over more examples, tying in everything we’ve talked about in this article. Synopsis of Earnest Money Minimum money for earnest money: $0.00 but this is not always possible. 1% is the norm in some areas. Sellers can potentially accept $0.00 but this is unlikely. If required, there is no way around earnest money. The good news is, if the rest of the transaction is structured appropriately, all of the earnest money can come back to you. Example Scenarios Now, let’s put all of these elements together in a couple of scenarios. These are fictitious and the numbers used are partly for convenience (for example, 2% for closing costs might be reasonable but it could also be way off. This is just for illustration of the principle.) Scenario #1 100% Financing, Seller Pays Buyer’s Closing Costs Here, the buyer is purchasing a house with $1,000 out of pocket (see yellow line). His financing requires no down payment and his closing costs are covered by the seller. Loan Type: VA with 100% financing Purchase Price: $500,000 Down Payment: $0.00 Earnest Money: $5,000 (1%) Buyer’s Closing Costs: $10,000 (All Buyer’s Closing Costs paid by Seller) Inspections: $1,000 This second table shows a timeline of how long the earnest money might be tied up and when the earnest money and inspection money are due. This will depend on where you live – you need to consult your agent to discuss how this will work in your situation and area. Scenario #2 Down Payment Required, Seller Pays Buyer’s Closing Costs Here, the buyer is purchasing a house with $18,500 out of pocket (see yellow line). His financing requires a 3.5% down payment and his closing costs are covered by the seller. The difference between this Scenario #1 and the first is simply that a down payment is required. The closing costs are all still being paid by the seller. Loan Type: FHA with 96.5% financing (maximum FHA loan amount = 96.5%) Purchase Price: $500,000 Down Payment: $17,500 Earnest Money: $5,000 (1%) Buyer’s Closing Costs: $10,000 (All Buyer’s Closing Costs paid by Seller) Inspections: $1,000 Scenario #3 100% Financing, Buyer Pays Own Closing Costs Here, the buyer is purchasing a house with $11,000 out of pocket (see yellow line). His financing requires a 0% down payment but his closing costs are not covered by the seller. Loan Type: VA with 100% financing Purchase Price: $500,000.00 Down Payment: $0.00 Earnest Money: $5,000 (1%) Buyer’s Closing Costs: $10,000 (Not paid by Seller) Inspections: $1,000 Scenario #4 Down Payment Required, Buyer Pays Own Closing Costs Here, the buyer is purchasing a house with $28,500 out of pocket (see yellow line). The buyer is paying both the down payment and her own closing costs. Loan Type: FHA with 96.5% financing (maximum FHA loan amount = 96.5%) Purchase Price: $500,000.00 Down Payment: $17,500 Earnest Money: $5,000 (1%) Buyer’s Closing Costs: $10,000 (Not paid by Seller) Inspections: $1,000 Scenario #5 100% Financing, Seller Pays Buyer’s Closing Costs, Seller Requires No Earnest Money, Buyer Waives Inspections Here the buyer is purchasing a house with $0.00 out of pocket (see yellow line). This is a less likely scenario because a seller is usually going to require earnest money. And waiving inspections is rarely a good idea. But this is a possible scenario that you could definitely make work if it made sense – it would probably require a bit more looking than the others – in order to find the right seller.
Holiday Event Guide Portland, Oregon Area 2022
If you are looking for things to do in the Portland area this last week before Christmas (and the week before the New Year), here are a few ideas... Pittock Mansion 'Music Makes the Season' (through 1/4) - Click image for more info. Oregon Zoo 'Zoo Lights' (through 1/5) - Click image for more info. 'Christmas Festival of Lights' at The Grotto (through 12/30) - Click Image for more info 'Winter Wonderland' at P.I.R. (through 12/31) - Click image for more info. Christmas Ships (through 12/21) - Click image for more info. Harry Connick Jr. - A Holiday Celebration (December 22) - Click image for more info Oregon Ballet Theater - 'The Nutcracker' (through 12/24) - Click image for more info. Photos with Santa at Lloyd Center (through 12/24) - Click image for more info. Photos with Santa at Clackamas Town Center (through 12/24) - Click image for more info. Christmas Lights at Peacock Lane (through 12/31) - Click image for more info. Michael Allen Harrison's Christmas at the Old Church (through 12/24) - Click image for more info A Very Brassy Holiday (December 21) - Click image for more info Pink Martini New Year's Eve Celebration (December 31) - Click image for more info
Molalla Real Estate Update
Here is the Molalla Real Estate update for December 10th:
Why Do People Think the Real Estate Market Will Crash?
The hot topic in real estate right now is a Crash, à la 2008. I am going to discuss the likelihood of a crash… but not here. In cliffhanger fashion, I will put out another article tomorrow in which I’ll discuss the likelihood of a crash. What I’d like to discuss here is why an imminent real estate market crash is such a widely-held belief right now. As a real estate professional, Crash Talk is, lately, a daily part of my life… in conversations with the general public and with other real estate professionals. Regardless of the data supporting – or not – a crash, I want to talk about why people’s minds even entertain the thought. Heard mentality One of my favorite words is catastrophize (which isn’t in my Oxford printed dictionary but Merriam-Webster.com tells me has been around since 1962) because I feel as if so many of the problems people face haven’t actually happened and probably never will. And I think that this idea applies here. People are viewing changes in the market and catastrophizing them into a market implosion because it’s what we do. We, as people, don’t like to paint rosy pictures. So we automatically go to the catastrophic end in our heads and then herd (heard) mentality plays right into it… “Someone said there’d be a crash and that a crash would be terrible, so I believe it too and it’s gonna be really bad.” No facts here – just human nature. Crash /kraSH/ “a sudden disastrous drop in the value or price of something…” [1] Let’s try to define crash. We can all agree that a crash means that the value of the crashee has diminished. But no one discusses the severity… ‘going down in value’ and ‘disastrous drop in the value of something’ are not the same. So when I speak of a crash, is it the same crash of which you speak? Do most people mean to imply ‘disastrous’ when they say crash? Or do they mean something less severe? And then the news media gets involved and it’s even worse. They have the dubious label of authority, they have the definite advantage of reach, yet they have the same blurry definition of what they’re reporting. (I’m sure they prefer the more extreme implication). Are they using the same definition as the audience? Certainly not. They’re talking to millions and, as you know, there’s no way that millions of people are on the same page about anything. Ever. One thing that we can probably agree on, though, is that crash is universally perceived as bad, regardless of the severity. No one ever says, “that was a market crash,” meaning, “that was a totally excellent market crash”. So, that’s that. But is it? Is a crash bad? In the instance of today’s real estate market, would the results be universally bad (as crashes are supposed to be)? I would say that a lot of people who are worrying about a crash have no reason to and that some others might even consider hoping for a crash of some flavor. (Remember, I’m not talking about a recession or inflation or job loss here – just real estate crashes). Don’t Worry, Be Happy Does a market crash really matter to those who own a house and have no plan to move any time soon? Does the market really matter? Your residence is not a day trade. You’re most likely locked into a low, low 30-year rate on your house, so you know exactly what you’ll be spending every month. What payment you can afford is what determines your home purchase in the first place – regardless of the value of the asset underneath. You are paying the same amount for the benefit of a place to live regardless of the current value. Same goes for investors (not to be confused with flippers – nothing wrong with flipping but it is speculative and times of devaluation can definitely hurt these day traders of real estate). Investors continue to collect rent. And as rents increase over time - and there’s no indication they won’t – while mortgage payments stay fixed at those low rates, cash flows increase. As a matter of fact, in investment real estate, people often discuss buying the stream of income, not the asset. Investment real estate analysis is based on income. And what about people who don’t own real estate but would like to? There is an entire segment of the market – made up largely of Millennials and those younger (that is, First Time Homebuyers) – who were priced out of homeownership because of the huge increase in values. If the market were to ‘crash’, it might not be so bad for those folks. All else (interest rates) equal, a lower price means more house for the money. Or any house for the money. Some people bemoaning the idea of a crash might actually benefit from it. Fake News – More Reasons a Crash is Assumed Part of the reason that a crash is assumed by the public without much thought is because the sources of so many people’s news are social media and mainstream media. And, I’m here to tell you – in case you didn’t know – both sources love sensationalist hype. As to the mainstream media, the adage goes, “It’s got to bleed to lead”. Creating a teaser that says, “Tonight, everything is fine. News at 11,” doesn’t pique much interest. So with everything from weather to war to economics, we hear the stuff that the media thinks will grab and hold our attention. Like train wrecks – figurative and literal. The problem with social media is two-fold. There’s the same sensationalism, of course. And there’s also the fact that anyone can say anything without any substantiation, research, or knowledge. Most alarmingly, everyone else eats it up. Why would anyone listen to some Facebook dunderhead spouting wild opinions about anything – does he or she have some innate knowledge or learned authority about the subject? Particularly about anything as complex as economic markets? So much of what I read about real estate and economics is simply make-believe or relies on circular logic. All of this is to say: our sources suck. Short Memories and Quid Pro Quo And let’s discuss people’s short memories. People think a crash is imminent because, well, it’s what happened last time we took a crazy ride on the real estate express. The Great Recession, or the World Financial Crisis, or whatever you want to call it, is the freshest experience in our minds. Because of our short memories, we find it easiest to assume this will happen again: “last time there was a big thing in real estate, the financial world fell apart.” But, of course, that’s faulty logic – there are always ups and downs (thus cycles) – but ‘up’ cycles aren’t all clones of each other nor are ‘down’ cycles. They also don’t necessarily act like their antecedents. It’s also faulty fact gathering – the real estate environment is nothing like it was before the Great Recession. I’m not going to back this assertion up right now – I will in tomorrow’s article – but, if you can’t wait, hop on Google. Lastly there are the ultimate pessimists who think that a penance is due. I can understand the thought processes behind the other outlooks we’ve talked about, but this one kind of cracks me up. As it turns out, after much research (you can Google this too if you don’t believe me), I have determined that “Pay the Piper” is not an official part to any business cycle. Just because things are (perceived as) really good (which we’ve already determined they may not necessarily have been) does not mean that the Universe somehow knows this and is going to bring things back to ‘even’ by manifesting something really bad. I really doubt the Universe gives much thought to our business cycles. And if it did, I don’t think it would run things using a tit for tat system. Universes are way cleverer than that. [1] New Oxford American Dictionary, Third Edition
Expanding Urban Growth Boundaries (UGB's)
Though this video is specific to the city of Molalla, it is a good overview of the beginnings of the process of expanding a UGB in Oregon (obviously a good deal less complicated for Molalla than, say, Portland). Representatives from the DLCD (Department of Land Conservation and Development) were at the meeting to give broad descriptions and answer specific questions. If you're interested in how this process works, take a look!
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.
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.
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.
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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