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PURCHASE STRATEGIES: Delayed Financing and other strategies to help get your offer accepted

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Strategies to Help You Get Your Offer Accepted

I hear all the time how homebuyers have submitted offers on many homes and they are frustrated because they lose for a variety of reasons, often to cash offers.  If you are waiting for your train to arrive in the form of an accepted offer, you may want to consider the strategies below before the train leaves the station and the price of a ticket goes up too much more.    Admittedly, the delayed financing strategy is only going to be viable for a small percentage of the home-buying population, but I thought I would make people aware of it – I’ll also include a few other strategies that could work to help your offer get accepted.

Delayed Financing

Cash is king and when it comes to purchasing a home, this axiom absolutely holds true.  A cash buyer can close more quickly (usually) than a buyer who needs to get a mortgage.  There is also a greater likelihood that the deal will close with a cash buyer (assuming the seller has verified that the buyer has the funds to close) than with one who needs to get a mortgage.  The speed and certainty of a cash buyer is a big advantage that will likely get their offer accepted over any offer that needs financing, assuming the offer price is reasonable relative to the asking price.

Most people want to finance the purchase of their home even if they have the cash to buy it outright – cash in a home is illiquid and the return on that investment is only the appreciation you get on the house – money tied up in a home is dead equity.  A buyer who can pay cash but chooses to finance the purchase gets the benefit of leverage which means that his or her return on the investment in the property is a multiple of the appreciation rate AND the buyer has all of the cash they didn’t put into the house to invest in other things such as funding their Roth IRA, investing in stocks / mutual funds in a non-retirement account, or buying investment properties.

If you have the ability to pay cash for a home, you can take advantage of the benefits (see above) this will provide in terms of getting your offer accepted and after you close, you can take a mortgage out within 6 months of the closing date and have the mortgage treated the same as a purchase-money mortgage.  You won’t have to worry about paying a higher interest rate because this mortgage isn’t considered a “cash-out” loan.  Additionally, you can use the money for whatever you want, including consolidating non-tax-deductible debt and you will likely still have the mortgage interest tax write-off (the tax code is changing as I write this so consult a CPA) since this mortgage is considered a purchase mortgage and not a cash-out refinance.  However, if you don’t close on the mortgage within the 6 month time frame after you closed on your house, then you will not get these benefits.  It will still be good to have the cash for investing / debt consolidation purposes, but the other things are important as well.

Timing

Many people, especially families with children in school like to shop for and buy their home in the late spring through the summer when the kids are out of school and there is less disruption as far as school is concerned.  That is always the busiest time of year and a buyer is more likely to be competing with other buyers for the same home and encounter multiple offer situations.  Additionally, sellers will probably be less willing to negotiate since buyers are more plentiful at that time of year.

Buying a home in the late fall through the early spring will mean fewer buyers to compete with and sellers may be more willing to negotiate.  The holiday season may even ramp up this advantage for the buyer even though this may not be ideal relative to having family over and other normal celebratory activities.

Keep the Big Picture In Mind

Everyone likes to get a deal, or at least feel like we got one.  That said, deals are relative AND in housing where no two houses are exactly the same, determining a fair price is much harder than buying milk or some other commodity at a grocery store or a pair of pants at a clothing store.  Determining the price of a home isn’t an exact science and sellers have their reasons for asking a certain price while buyers have their reasons for offering a certain price.  It’s best to keep emotion out of the equations as much as possible.

Buyers who submit offers below the asking price are at an obvious disadvantage to those who submit full-price offers, all else being equal.  The same is true for buyers who ask the seller to pay closing costs when competing buyers may be willing to pay their own.  I’ve worked with many clients who have submitted many offers over the period of several months and they were always trying to get a deal (basically they refused to offer full price).  In the end, they paid more for the house they got because of the appreciation over the time that it took them to get an offer accepted.

Consider a home with a purchase price of $250,000 in a hot market – I’m licensed in Nevada, Utah, and Tennessee and all of these places are projected to be top-10 markets for 2018.  If the appreciation rate is 6% (not super hot, but strong) then that home will appreciate $15,000 in a year and $7,500 in six months.  Some of my clients have taken 6-12 months, and on rare occasions even longer, to come to terms on a home because they wanted a deal.  If a buyer takes six months to buy a house in this scenario, they just cost themselves $7,500 (more if the home they were looking to buy had a higher starting price).  Had the buyer submitted a full-price offer six months prior, he would have paid $250,000 but now he has lost out on six months of living in his home and instead of the buyer getting the appreciation, he is paying for it in the higher price.

Paying full asking price for a home isn’t always the right thing to do and sometimes it’s best to walk away from a deal and look elsewhere.  However, sometimes it is appropriate to pay over full asking price – some sellers purposely ask for a low price to generate a bidding war and other times they are not properly advised by their agent.  A buyer will have the best chance of being successful when they have a great agent representing them.  I know a few so feel free to reach out to me if you need a referral – my contact info.

 

The Benefits of Home Ownership

Real Estate and Wealth Creation

Like most things, there are costs and benefits, the yin and the yang, the good and the bad…well, I think you get the point.  So lets look at the benefits of home ownership vs. renting.  This isn’t meant to be comprehensive in any way, but hopefully it will provide some ground work if you are vacillating between buying a home or just renting FOR.THE.REST.OF.YOUR.LIFE!!

Stability

There are a couple of angles to this argument.  First, if you finance your home with a 30-year fixed-rate mortgage, you have stability with regard to your payment.  It will still vary a little as property taxes and homeowners insurance rise, but the biggest part of your payment will remain the same for 30 years – of course, it’s a rarity that people keep a house for that long (and for wealth creation purposes, it may not be the best strategy – check this out) or their mortgage since people have been known to refinance to take cash out of their house to use for a variety of things.  Regardless, if you keep your house and your mortgage for 30 years, you’re principal and interest payment won’t change.  You can’t say the same about your rent; as prices go up, you better believe that the rent your landlord charges you will also increase.

A second element of stability is that you control where you live.  If you own your home, you can live there forever and decorate it however you want and redecorate it to your changing tastes whenever you want.  Conversely, if you rent a home, you may be forced to move if the landlord decides it’s time to sell – for any number of reasons.  If you were lucky enough to have a landlord who didn’t increase your rent much of the several years that you lived there because he liked you and appreciated your on-time payments, you will now likely experience a large increase in your rent payment if you move into a similar home.

Wealth Creation

I talk a lot about this; one reason is because the savings rate in the US is very low compared to other 1st world countries.  We need to do a much better job of saving and, better yet, investing.  The 2nd reason is because while there are lots of great investments, real estate is probably the best.  More millionaires have been made from real estate than any other single form of investing.  With real estate, you get the ability to use leverage.  There are also great tax benefits that help you keep more of your money for investing.  I’ve got a 6-part video series on my website about real estate investing; each video is from 5- 12ish minutes – check them out and you’ll get a clearer picture of why I’m a fan – you’ll find them in the drop down menu.  The bottom line is that when you own real estate, with few exceptions, you will create wealth for yourself.

If you rent, you get to help someone else create wealth.  They enjoy all the benefits of wealth creation that real estate provides.  What is your plan for retirement?  Do you have one?  Many people, dare I say most people don’t.  The right kind of real estate can help you grow your assets while you are working and don’t need income from your rental properties.  When you want to retire, you can switch your real estate to more income-oriented properties.  Check out the video series for some great ideas and strategies on real estate investing.

Tax Benefits

I don’t think people should ever make a decision based solely on tax benefits but they are nice to have.  Buy a home for the stability and the wealth creation capabilities it offers, but enjoy the tax benefits of being able to write off your mortgage interest and your property taxes.  Sometimes the government even lets us write off the mortgage insurance.  If you own an investment property, probably not the first home you will buy, then you get big tax deductions like depreciation and you get to defer your capital gains via a 1031 exchange.  Just watch the video series and you’ll get it all there.

It’s Your Home

In the end, when you own a home, you can do whatever you want with for however long you want to live there.  My parents owned the home I grew up in for 25 years before they sold it after my brother and I were all gone and they moved back to Salt Lake.  I have lots of memories in that home.  Some of the memories are of all the redecorating and remodeling that was done over that period including a MAJOR renovation that they did after my brother and I were out of the house.  Other memories were of Christmas mornings, Thanksgivings with friends, playing baseball and football in the back yard and basketball in the driveway.  I don’t think these memories would be the same in an apartment or home we were renting.  It was our home and I’ve tried to do the same with and for my kids.

Tools for Realtors

For Realtors

I love good technology.  I love tools, software and hardware, that will help me be more efficient or better than I would be if I didn’t have that tool.  With that in mind, here are a few tools for my Realtor friends (clients may very well get great benefit from them as well).

Zoom Video Conference software

This is such a great tool – I use it to meet with Realtors and clients near and far.  If you have an out-of-town client who you want to meet face-to-face with before they come to town to start looking at homes, it’s hard to beat Zoom.  The software is free (there is a paid version but I’ve never felt the need to upgrade to it) and it has lots of features.  It allows you to share screens with each other as well as for either of the people on the call to take control of the other’s computer.  If you have any need for video conferencing, check out Zoom.us.

Google Drive / G-Suite

I’m a big Google fan.  I use gmail and all of the related software including Google Docs, Google Sheets, Google Slides, Google Contacts, Calendar, and the list goes on.  For $1.99 per month, you get 100 GB of storage on Google Drive and you get the ability to share stuff with clients, lenders, title companies, etc. via and email link.  It’s a great way to store contracts and related documents and have easy access to them in the cloud from any device no matter where you are.  For $10 per month, you get G-suite which provides 1 TB of storage and a host of other things for business owners.  If you have your own domain, G-Suite allows you to use gmail and set up your email so that you can have an email like this: name@domainname.com.  If you don’t have a domain, you can get one through google domains very cheap.  Check out G-Suite for the cheap storage alone; you’ll be impressed with all the other stuff you will get.

Word Press

Realtors tell me all the time how they hear that they need a website.  Back in the day, with good SEO (search engine optimization), websites were a good lead generation tool because relatively few Realtors had good websites that were ranking high in google searches (or any search, for that matter).  Today, most agents have websites in some form or another and the lead generation utility of websites is saturated.  That said, I still think it’s important to have a good website.  By this, I mean a site that you can build (or have someone help you build) and then manage it the way you want – it should be your website, not a company website.

You may want to look at your website not so much as a lead generation tool but as a bucket that holds all of your media content that makes it easy for you to share.  For instance, building my website is a continual process and every post I make is a media asset that I can share across social media platforms any time I want.  By having my videos, blog posts, spreadsheets and other media pieces in one place, it makes it easy for me to find any and all of the marketing I’m looking for – I don’t have to remember where I saved a given piece that I want to share with a client (although I do have copies of most of my stuff on external hard drives and Google Drive – I like redundancy) or on social media; I know it’s probably available on my site.  Evergreen pieces (content that is good across time and is not based on a specific occurrence at a specific time) are available for me to share whenever I want, whether it’s a holiday piece that I’ll share every Christmas, or a spring-time home-buying piece or whatever, having my media on my website allows me to be very efficient with how I share it and who I share it with.

Finally, as much as possible, try to create original content.  I can’t tell you how many times I see Facebook shares from Realtors of the exact same article – and I’m not talking about an article they are sharing from a media source like Forbes, CNN, or a similar outlet.  I’m referring to articles that are on their websites – you’re probably familiar with the various options that Realtors have to purchase websites that are built for Realtors and all the content is included in the price so that they don’t have to do anything.  The problem with that is when a client signs up for a home search on your site and does the same on a few other Realtors’ sites and then gets the same content from each place (I’ve experienced this personally), it’s a real turnoff because we know that the Realtor isn’t putting forth any real effort.

I use Word Press – it’s far more than just a blog and is very versatile.  I have one site for my mortgage business and another site for my music production stuff.  I love the ability to change anything I want, whenever I want.  The flexibility is fabulous.

Other tips and tricks:

There are many other tips and tricks that I can share with you to help your business look and be successful.  I will probably put these things in another post, but if you want to get a jump on what some of them are, feel free to contact me and arrange a consultation.

The Young Father and the Three Lenders

Bedtime Stories

Once upon a time a young father decided to apply for a mortgage so he could buy a home for his wife and baby.  He provided all of the necessary documentation to get pre-approved and after a quick review, the loan officer (yours truly) gave the young father an approval.

Excited about the possibilities of what lay ahead, the young father contacted his real estate agent to go look for homes.  They searched far and wide (literally) and finally found a home that worked for the young family that was in their price range.  They wrote an offer and it got accepted and they were on their way to closing on their first home.

Until…

The young father was furloughed from his job with Union Pacific Railroad.  This is not uncommon during slower times and since he was lower on the totem pole relative to his seniority, he was one of the unlucky ones.  He called his loan officer (me) with the bad news and was informed that he would no longer qualify to purchase the home they had found – no surprise to him.

After about five months he was called back to work.  He found out that many employees who had seniority over him who had also been furloughed quit which moved him up the ladder and made it less likely that this would happen again.  The young father contacted me to see how long it would take before he could get approved and was informed (by me) that it would probably take 7-9 months, give or take, before he could qualify since his average monthly income needed to be high enough to service his debt ratio.

Tick Tock

Over the months of working to get his average income level back to where it needed to be, the loan officer (me) contacted the young father on a regular basis to see how he was doing and make sure that he was on track (no pun intended on the railroad reference).  After a little over seven months the young father began to get anxious and wanted to see if a different lender might be able to get him approved to buy a home sooner than the original lender (me).  The first lender he spoke with denied the loan altogether saying that he didn’t qualify for anything.  Frustrated, he called another lender who said he could approve him to buy a home that cost $100,000 – there was really nothing at all this cheap.  Finally, he contacted the original loan officer (me) about eight months after being furloughed and asked to see what I could approve him for.  He provided all of his updated documentation (most recent pay stubs and bank statements) and I pulled a new credit report and I told him that I was able to approve him for $170,000 – he was excited because he knew he could find the right home for his family in that price range.

With the approval in hand, the young father went back out with his Realtor and after looking at several homes, they found another home that was just right.  They made and offer and it got accepted.  This time, there was no furlough and everything went smoothly.  The young father and his family closed on their home and are living there happily ever after.

The Moral of the Story

The lender you use makes a difference.  A lender who understands the guidelines, how to properly calculate income and highlight the positives of a file so that the underwriter feels good about approving it is key to the success of many loans.  When that same loan officer can also provide strategies to help clients create wealth and prepare for retirement, that’s a winning combo.  Contact me and put my experience and expertise to work for you.

 

Winning in the Multiple Offer Game

Bedtime Stories, For Realtors

I’ve been in the mortgage business over 22 years and over that time, I’ve noticed patterns. For instance, the market always takes a pause around the holidays. Buyers typically either want to be in their new home before the holidays – especially Christmas – or they typically wait until after the new year (often times until toward the end of the school year).

This provides a once-a-year opportunity

I had a client who put in offers on several homes over last spring and early summer only to lose out to multiple offer situations with “highest and best” offers.  They took a break for a couple of months and decided to give it another try. They got an offer accepted that was below asking price AND didn’t have to compete with a bunch of other offers.

Many investing gurus say that you shouldn’t always follow the crowd. I think that advice applies here – buy a home now while everyone else is waiting until next year – you’ll get a better price, better rates (they are trending up) and you’ll give yourself and your family an AWESOME Christmas present.  BONUS:  if you move in over the Christmas break, your whole family will be able to help with the kids out of school and a week off of work for you (assuming you have a week of vacation left). Feel free to contact me to see how much you qualify for – happy house hunting.

Case Study: Larger Down Payment vs. Money for Investing

Real Estate and Wealth Creation

Let me begin my story by providing you with a little background so that you will have some context.  I talk to all of my clients about investing. Whether you are a first-time homebuyer or have owned many homes, I want you to understand investing concepts like the time-value of money and considerations when investing like leverage (something real estate investing offers) or accounts like Roth IRAs that allow your money to grow tax free and is tax exempt when you with draw money from it – assuming you are older than 59.5.  I also talk to my clients about the importance of estate planning, especially as their wealth grows.  With this in mind, here is my story.

The Story

On occasion, especially with move-up buyers, I get clients who have a fair amount of money for a down payment.  Many times, they want to put down enough money so that they don’t have mortgage insurance, often without any thought about what they will do with the money they have left over, but sometimes they plan to use the left over money to remodel their new home.  On one specific occasion a few years ago, I had a client who had $150,000 for a down payment plus a little extra for closing costs and he wanted to buy a $300,000 home.  I cringe inside when people tell me they want to put down and inordinate amount of money.  I asked why he wanted to do that, especially considering the fact that money is so cheap right now (rates have been very low for several years now) and he told me that he wanted to have enough money left over at the end of the month to invest.

I told him that I was happy to hear that he was thinking of investing and that most people don’t typically do that.  I also told him that he should look at the numbers to see what’s going to be best for him.  He didn’t quite understand what I was talking about so he asked me to explain.  I told him that he could put 20% down ($60,000 on a $300,000 home) and have $90,000 (of the $150,000 he was planning to put down) left over for a large lump-sum investment.  I further explained that by putting 20% down, he wouldn’t have mortgage insurance which would help keep his payment low like he wanted.  I then put together a spreadsheet for him to compare the difference of putting $60,000 down on his home purchase and investing $90,000 right now vs. putting $150,000 down and investing the monthly savings between the payments on the $240,000 mortgage vs. the payment on the $150,000 mortgage.  More on this in a minute.

Some other considerations

I discussed with him the fact that when you have a large amount of money to invest, you have more options for investing, some of these options have a better chance of a higher rate of return than the limited options for the monthly amount.  One possible options is that he could easily purchase an investment property (see my post on Real Estate Investing for a list of benefits) and still have a large chunk left over for some liquid investments.  With only a small monthly amount to invest, he would have limited investment options – usually mutual funds (which can be very good) – that would allow him to set up an automatic investment plan for a specific amount to be invested every month.  Additionally, when things happen like car repairs, home repairs, vacations, and Christmas, it’s pretty easy to justify not making the investment that month so that you can use that money to help offset the “unexpected” costs.  Conversely, when a person has a large chunk of money in an investment and s/he sees it making considerable gains, that person is likely to try to absorb the costs of various expenses by means other than dipping into an investment account that is growing nicely.  This attitude alone will help the bigger investment out-perform the small monthly investment, all else being equal.

Here are the numbers 

I calculated what the value of a $90,000 investment would be in 9-year intervals (I used this interval because I used a fairly conservative 8% rate of return and the Rule of 72 says that with an 8% return, your money will double about every 9 years – it’s actually a little less than that) and after 30 years with an 8% return, it would be worth $984,215.67.  On the other hand, investing $469.48 (the payment savings on the $150,000 mortgage vs. the $240,000 mortgage) every month for 360 months (30-years) with an 8% return would yield a value of $699,697.83.   The difference is substantial:  $284,517.84 in favor of the large lump-sum investment option of $90,000.  If after 30 years he doesn’t need any of the money (in either option) and leaves it invested another 9 years, the disparity is even larger.  The $984,215 doubles to about $1,968,430, whereas the smaller account is only worth $1,399,394.  That’s a difference of $569,036.  The principal of the Time-value of Money says that a dollar today is worth more than a dollar tomorrow because today’s dollar can work for you.  Based on that principal, it’s imperative to get as much money working for you as soon as possible.

Another scenario I see quite often 

Some of my clients want to pay off their mortgage sooner rather than later so they ask me about a 15-year mortgage.  Again, I cringe inside because I know that in the long run, if they are responsible with their money, they will come out ahead with a 30-year mortgage.  The final decision is always up to you, the client, but here are the numbers based on a $240,000 loan.  At 4.25% on a 30-year fixed-rate mortgage (a good representation of where rates have been over the last several months), the principal and interest payment is $1,180.66.  The payment on a 15-year fixed-rate mortgage for the same amount at 3.50% is $1,715.72.  So the scenario is that you pay $1,715.72 for 30 years in either scenario.  With the 30-year mortgage, you pay your mortgage payment of $1,180.66 and a monthly investment of $535.06.  With the 15-year mortgage, you pay $1,715.72 for 15 years until your mortgage is paid off and then you pay that exact same amount to your investment account.  At the end of 30 years, you’ve paid the exact same amount either way but with the 30-year option and an 8% return, your investment account is worth $797,435.24 whereas with the 15-year option, it’s only worth $593,704.04 – a difference of $203,731.20.  I’m not even taking into consideration the extra tax benefits the 30-year option would provide via the mortgage interest deduction.

In closing 

it’s important to make decisions with as much information as possible.  We all have different needs, wants, desires, goals, and comfort levels.  You need to choose what you think is best for you based on the information you have.  My goal is to help you make an educated decision and to have access to the best professionals so that you have the highest chance of success when it comes to preparing for retirement.

Structuring Your Mortgage: Rate and Payment are Secondary

Real Estate and Wealth Creation

When most people get a mortgage, they focus on what the rate is and how low the payment is – which is determined by rate, down payment amount and term. What most people lose sight of (or don’t think about in the first place) is their overall financial picture.

Are You Prepared for Retirement?  

The fact is that most Americans are ill-prepared for retirement. Additionally, they also don’t understand financial concepts and strategies that will help them properly prepare for retirement. The best time to start preparing for retirement is NOW.   Paying off your mortgage as fast as possible is not the smartest financial decision for a number of reasons, perhaps most of all, because there are much better places to put your money when it comes to creating wealth.

Creating Wealth vs. Paying Off Debt

While having a great low rate is important when getting a mortgage, getting the lowest payment is not. Getting the lowest possible payment means putting down as large a down payment as possible which means less money for investments and a smaller tax deduction. This is the other thing that people don’t put enough importance on – tax strategies. While we shouldn’t have a tax deduction as our primary element on which we make a decision, proper tax planning is very important. For instance, a Roth IRA is much better than a traditional IRA. There are many ways to grow wealth and keep it, rather than paying taxes (income, capital gain, estate, etc) to the IRS, if you have the knowledge and the right team in your corner.

Investing in real estate is a great way to create wealth and it has some great tax advantages, too. There are also other liquid investment options that give you the opportunity to create wealth and tax plan. When you use me for your mortgage needs, I will help you understand how structuring your mortgage the right way will help set you up for financial success. I can also introduce you to a variety of financial advisors who can help you put together a financial plan that will set you up for success. Contact me for a free consultation to see how much more you can have at retirement when you consider the bigger picture.  Check out my Case Study post for some actual numbers from a client I helped who wanted to put 50% down on a $300,000 purchase.