Thrive Don't Survive

Memory Lane and Perspective

Maybe you don't remember 17% mortgage rates, or 14% "under market" rates with "10 points" in order to get such an "advantageous" VA loan.

Some of us remember. The time was 1980 and 1981. Some senior brokers not only survived, but thrived during that period. Why could we thrive in such a harsh environment? Because we learned how to ADAPT to the market rather than to "wait" for the market to "turn." There are a lot of buyers, sellers and AGENTS who are "waiting for the market to turn."

Think about it. In any market SOME people will move, near and far. Where there's a will there's a way. Transactions in this kind of market need to be scrupulously negotiated with the benefit of allied professionals, including lawyers, real estate pros, accountants and others.

Maybe you forgot about the late 80's real estate boom that burst into an early 90's banking crisis, which in turn helped to force down house values to the point where many sellers were bringing thousands of dollars to the closing to pay down the existing mortgage to the point where the new value had declined. This broker witnessed several instances where sellers had to bring tens of thousands of dollars to pay down a loan in order for the existing primary lender to agree to a sale. If you were transferring to better job in another state at the time, you may very well have taken it to better yourself and your family in the long run. Many did just that. Only people with assets more than their house did that, of course. They were the only ones worth going after. People with little or not net worth gave the bank their house keys, or deed the property back to the lender "in lieu of foreclosure."

Where We Are

We're not in a bust - at least not yet. Most economists are still not predicting a bust, but rather a gradual "easing" or moderation of prices. Translated that means slight price declines, or gradual price flattening, but not huge price declines. The "sub-prime" lending crisis however bears watching and has added and additional investment risk factor to the capital markets. A burgeoning foreclosure market is also affecting the capital markets. But, you need to keep things in perspective

Fortunately the economy is still rolling along rather briskly. Should that change unexpectedly, or some calamitous national even that could cause a recession, and the housing market could feel the impact quite severely. Currently the new construction market seems to be suffering the most with building activity declines in the double digit ranges year over year, declining demand in a slower real estate market, and a glut of unsold inventory.

Still we are now still considered to be in an "easing" mode of the market, and mortgage rates are still in the historically low ranges of about 6%.

In another section we mentioned that the value of real estate has more to do with local economics than the "sticks in the ground." A quick illustration of this is that home buyers very often "buy the payment."

The difference between a 5% mortgage at $350,000 and an 8% mortgage for the same is a 36.5% increase in monthly payment. So increasing mortgage rates diminishes buyer affordability potential in a "slowing" market with rising interest rates. Having a 30% increase in mortgaging ability means 30% less house, or buying the same house for 30% LESS. So, either sellers reduce prices in order to sell, or buyers spend more. Usually it's a combination of both that keeps the market moving.

There are however many additional ways to incentivize buyers to purchase your home without "giving it away." Potential incentive offers are limited only by your willingness and imagination.

For a couple of quick examples:

1. One past client was so intent on getting 30+% more than fair market value that he offered his home with "seller financing" at a 1% interest rate.

2. In high interest rate times circa 16% mortgage rates, several brokers offered SEM (Shared Equity) mortgages, where an investor would be paired with a buyer to subsidize the interest rate from a market rate of 16% down to a 12% rate. In this scenario, the investor supplied about 25% of the cash outflow in order to receive a 50% tax deduction (tax brackets were higher at the time). In addition, the investor would share in the profits from the eventual sale. It was a good deal for the seller - who got his/her property sold faster because of the "attractive terms.

The investor also liked the deal at that time, because after "writing off" 50% of the cash outflow for only 25% of the cash input, the investor's tax dollar liability from various sources were essentially paying for the deal, and the investor STILL got to participate in the eventual resale proceeds. This finance option later became less attractive for investors, with changes in the tax law and IRS Code.

3. In certain circumstances where it would add a lot of value to the buyer side of a transaction; instead of reducing a $500,000 home by $40,000, why not offer a $20,000 auto instead of the $40,000 price reduction. That's only a 4% reduction in price instead of an 8% cash reduction, but in a situation where a buyer really needed a new vehicle, but was cash-strapped after the closing; and/or their circumstances wouldn't allow for adding a $300 auto payment to their debt ratios.

This scenario actually allows the buyer the chance to build the $20,000 car payment into the 30 year house mortgage reducing a $300 payment to less than half that: $120 a month at 6%. For some buyers this might be just the incentive to choose one house over another. Who wins? Buyer, seller and broker win. What's it worth? Investing $20,000 to make $20,000 look like a 100% ROI (Return On Investment) to me.

What about the "appraisal?" Appraisal isn't an exact science. It's part art and part science. A 4% value fluctuation can often be easily justified in most lending scenarios. but it's possible that it won't work. In that case at least you tried, and because of your efforts the buyer will often stick with you because they already have so much emotional effort and some cost likely already associated with the property. Quite often you can still work out a win/win situation that you may not have been able to with "tunnel vision" and "positional" thinking.

There are a myriad of options possible, but you need a knowledgeable creative broker, and a willing seller and buyer as part of the process. The benefit needs to be perceived as REAL by BOTH the buyer and seller. This requires great skill and creativity as well as matching the right buyer and seller together. This is likely beyond the scope of most marginal agents and rookies.

Foreclosure Rate Myths

Quoted from ConsumerAffairs.com in an article dated April 19, 2007.

"U.S. Foreclosure Rate Surges 47 Percent
What a difference a year makes. Foreclosure notices rose 47 percent from March 2006 to last month, according to RealtyTrac, a real estate research firm. The company said banks initiated 149,000 foreclosure actions in March 2007, the most since the company began collecting data.

The March numbers were up seven percent from the month before. It makes for a national foreclosure rate of one foreclosure filing for every 775 U.S. households during the month."

Catastrophic, right? Calculate the numbers. This "historically high" foreclosure rate is only 0.13% of US households. That's slightly over 1/10th of 1%. They are not historically high. It was around 4% in the 1990 - 1991 period as I recall.

Let us help you brainstorm to see of we can find a potential solution. We're a phone call away!

Chris Michaud
www.acceptancegroup.com
chris@acceptancegroup.com