Monday, August 4, 2008 - Separating the Puffery from the Real Thing

I was previewing a listing recently -- really anticipating what I was about to see, based on the description of the property -- "turn-key condition" and "stunning" and so forth.

Well, you know what happened. I got inside and was really let down. There was spackle all over the walls, the windows and mirrors were dirty, it was dated and just kind of grubby.

This is sort of the norm -- we agents tend to put lipstick on the pig and then be surprised when the feedback is negative. I remember a buyer - years ago - saying with a sigh, "Well, let's go look at some more creampuffs!"

Here's the rub. When you have a really nice listing to market -- one that really is above average and a pleasure to see -- the superlatives have already been used up and made meaningless.

Well, I have one of those listings in Cheverly. It just wows everyone who takes the time to see the inside. It looks small from the sidewalk, but it isn't small at all. It's got loads more space than you would ever imagine, if you would just take the time to see it!

Turn key? You betcha. A cream puff? I think so. While it has been beautifully updated, it has the type of character that belongs in an older neighborhood - which is a nice change from some of the sterile re-habs that were thrown on the market in the past few years. The current owner put lots of love into this house and it shows.

How do you sort through all the puffery? Do you look for words and photos that match? Or do you just hope for the best when you're looking at homes? I'd like to hear from you.

By the way, if you click on the photo or the link above, you'll get all the information about this particular listing - I know you're just dyin' to take a peek! :)

(C) Susan Pruden.

Friday, April 18, 2008 - What is My Buying Power and How Do I Lose It?

The scenario is this -- you're a buyer and you're ready to look for a house. You've met with a lender, who has told you that you can get a loan for $350,000. You even have a lender letter that says you are pre-approved for that loan amount. Now you're ready to look for a house, right?

But lenders don't approve buyers for loan amounts, they really approve them for a monthly payment. Why is this so important to understand?  This is because there are things that can change -- two big ones, in fact. The first is the interest rate, which can change at any moment up until the time you lock your rate with the lender. The second is the property tax, which varies by house and neighborhood.

So, the lender says you are approved for a monthly payment of $2,550, assuming an interest rate of 5.75% and property taxes of $5000 per year (and you're putting down 20% to avoid that mortgage insurance). This works out to a loan amount of $350,000 -- with 20% down, that's a $437,500 house! Not bad! But let's assume that while you're looking for a house, the interest rates go up half a percent to 6.25%. Remember, you're still only qualified for a monthly payment of $2,550. The increase in interest rate translates to a loan amount of $331,700. 

That means that, with a 20% downpayment, you just went from looking at $437,500 house to a $414,600 house -- an $22,900 loss in buying power!

The same thing happens with changes in property taxes -- the property taxes are a huge factor in how much house you qualify for. I recently saw a lender letter approving a buyer for a house, but the taxes that the lender used were almost $4000 less per year than the houses we were looking at! It makes a huge difference.

So make sure you know what these numbers mean to you. If you're not sure, give me a call -- I can help you work out the numbers.

(C) Susan Pruden.

Wednesday, February 6, 2008 - Verbal Offers on New Contruction

A reader wrote the following question to me:

I read the blog you wrote about agents not using written offers.  Would you say this also applies on new homes (submitting an offer to a sales office in a new development) Our realtor put in our offer verbally, and I wonder if it was the right way to approach it. Any advice is greatly appreciated.

If I were working with a buyer who was planning on putting in an offer to a sales office in a new development, I would recommend to my client that he put the offer in writing. One, if the offer is accepted, he's done! No need to have a second meeting to go over the details 'cause they're already worked out. Two, there may be lots of unanticipated costs with new construction - upgrades to features in the house can quickly add up and move the property into the realm of the "un-affordable". Isn't it better that my client knows the costs up front?

If the sales office representative recommended a verbal offer, I would want to know why. My client's written offer has a chance of being accepted. A verbal offer is likely to come back with a verbal "maybe" or "it depends". The builder may come back with a counter that isn't in my client's best interests, such as "we'll consider your offer if you agree to skip the home inspection". Then my client has already lost a step and hasn't even put the offer in writing yet. Then, what if a better offer comes in, in writing, before my client can get his in writing?

With so many buyers putting in low offers, whether it's new construction or re-sale, there is a temptation to see if the seller would even consider the offer. I can only offer an example from this past year: My client made a fairly aggressive offer that the sales representative didn't think would be accepted by the builder. I anticipated a counter-offer on a couple of the terms myself. Had the offer been verbal, it probably wouldn't have been accepted. However, the sales rep called me to say that, much to his surprise, the builder had accepted all the terms. He said the builder had rejected a similar offer just a month or two before. However, the market was changing and the offer that was unattractive a month before suddenly looked pretty good.

In my opinion, written offers trump verbal offers every time.

(C) Susan Pruden.

Saturday, December 29, 2007 - Buyers With A Home To Sell, Part 2

Yesterday I told the story of an offer that was contingent upon the buyer selling her house. The buyer didn't want to risk putting the condo on the market without a sure place to go.

The seller didn't want to take his house off the market unless the buyer made a good-faith effort to sell her condo.

The answer for the seller was easy, he rejected the offer.

But what's a buyer to do? The big fear, of course, is that the buyer will successfully sell their property and then have no place to go. The idea of having no place for the family to live is downright scary for most people.

While there is always risk in buying or selling a home, a good agent will minimize the risk to the buyer by inserting a contingency into any offers on that buyer's home. It makes the contract contingent upon the buyer finding a house to buy.

We call it a "house of choice" contingency. It's so standard, we even refer to it as "HOC". It goes as follows:

"The Contract is contingent until (Deadline) to allow Seller to enter into a contract of sale to purchase another home of Seller's election. This provision and the Contract will remain in full force and effect unless, prior to the Deadline, Seller, upon written notice to Buyer shall declare the Contract null and void."

Voila. If the buyer can't sell his old property by the deadline, he simply cancels the contract (or negotiates an extension on the Deadline) and ends up with nothing worse than a cleaner house and some inconvenience.

Once the buyer's house is under contract (with that contingency firmly in place), then a seller will take a serious look at any offers the buyer may write.

So, what's that sequence of events again?

1. 1) Homeowner puts his house on the market, noting that he will be inserting an HOC contingency (see? you're picking up the lingo already!)
2. 2) Homeowner accepts an offer on his house and then writes an offer on the house he wishes to buy, this time putting in a contingency that his old house must go to settlement before he can settle on the new house.
3. 3) Seller of new property feels secure in taking his house off the market, knowing that the buyer's house is already under contract and therefore the risks are greatly reduced.

It's not perfect, of course. Contracts fall apart for many reasons, but at least no one ends up homeless.

(C) Susan Pruden.

Wednesday, July 25, 2007 - What Does Your Pre-Approval Letter Say About You?

It's commonplace for a pre-approval letter to accompany an offer on a listing. The following are actual pre-approval letters that have been submitted along with offers on a few of my listings. As you'll see, they vary greatly in what they say.

1) The above referenced purchaser(s) has submitted a preliminary mortgage loan application to our company. Based on the information provided (i.e., income credit and debt obligations). The purchaser qualifies for the above loan amount and interest rate. Final approval is subject to verification of an appraisal and the purchase of suitable title and hazard insurance.

As you can see, this one doesn't say that they actually reviewed any documentation, and that the application is preliminary. Not sure what that means, but it sure doesn't make me feel like the lender has gone to any effort to substantiate their opinion of probable loan approval.

2) Congratulations! Double Y Mortgage Company has found you eligible for a mortgage loan towards the purchase of your primary residence in Maryland.  This approval is based on credit, income, assets and other information you have provided to us at this time. Please note that an underwriter will issue final approval at a later date after reviewing the purchase contract and other related information.

Again, no mention of actually reviewing documentation. Usually, this information is verbally provided by the applicant, then followed up with hard copies of paystubs, bank statements and W-2s. Did they do that here? Maybe, but I'm not sure.

3) Based upon our review of your credit history and additional information you provided, we are pleased to advise you that you have been pre-approved for a mortgage loan in the base amount of $180,000.  This loan approval is subject to final appraisal and a fully executed sales agreement of the property.

What additional information? For all I know, the borrowers gave the loan officer the name of his pets. Just not enough information.

4) Mr. and Mrs. Jones have been pre-approved by Double X Mortgage Services, LLC, for a mortgage loan. This is based on a tri-merge credit report, pay stubs, bank statements and conventional cash to close. Mr. and Mrs. Jones qualified for a conventional loan in the amount of $495,000. A final loan approval will be issued based on the following:

1) Conventional final underwriting
2) Contract ratification
3) Satisfactory appraisal.

All other documents are on file and the application is currently being processed.

See the difference? This last one tells me something. It still isn't perfect, but we know that his documentation has been reviewed. We know that the application is in process. All this letter tells me is that the odds are that the borrower will be approved. It's better than nothing and way better than the other 3 letters.

When an offer is submitted on one of my listings, I call the lender and ask about the borrower's qualifications. Usually the lender doesn't want to give me any details about the borrower's finances, which is the right thing to do. But my questions have more to do with the lender than with the borrower. I want to know how thoroughly the lender has screened this borrower.

This is a typical conversation between me and the lender:

Me: I'm just following up on the buyer's qualifications for this loan.

Lender: Oh, they qualify with no problems. Credit scores look great, their income is fine. No problems with this one.

Me: So you've pulled an tri-merged credit report or just an in-file credit report.

Lender: Well, an infile, but it looks great. We don't anticipate any problems on the tri-merge.

Me: And the income -- you've received copies of W-2s and paystubs and reviewed them?

Lender: I think so...wait...no, they're supposed to fax those over any time now. But they're way over qualified, so no problems there.

Me: Bank statements? They're putting 10% down. Do they have enough to close?

Lender: 10% down? We qualified them for 100% financing. I don't know if they have more cash, I'll have to check.

Me: Your letter didn't state the amount of downpayment, the interest rate or the specific type of financing, so I'm not sure if what you've approved them for matches the offer that they made on the property.

Lender: Well, I'll have to get back to you.

Buyers should be aware that cutting corners at this state of the game can have a very serious effect on getting their offers accepted. What surprises me is how few real estate agents call and interview the lenders. Many I've talked to feel that the lender won't give them any information anyway, so why bother. I feel that I learn so much about the lender and his level of competency and follow-through, that I get back every ounce of effort I put into it. 

And isn't that what the seller wants to know as well? That the lender is competent?