Tuesday, September 20, 2022

Five Factors that affect the Sale of Any Home



Owners directly control four of the five factors that affect the sale of any home: price, location, condition, terms, and the agent you select.  The one thing you can't control is the location of the home, but you can adjust the other factors to compensate for failings.

The seller controls the price of the home which determines its positioning in the marketplace.  If is priced too high, it will take longer to sell and, in some cases, for less than what it should have sold for because when it doesn't sell immediately, it is assumed that there must be an issue with it.  If it is priced too low, the owner will not realize as much of their equity as they should.

Not pricing the home in the proper search brackets could keep the property from being exposed to potential and likely, buyers.  For example, if a home is priced at $399,000 to follow an age-old retail marketing principle, many of the most likely buyers will never know about it because they are searching for properties in the $400,000 to $450,000 range.

The seller also controls the condition of a property which affects not only the marketability of a home but indirectly, the price.  Homes in the best condition appeal to more buyers because for the most part, they are using their available cash for the down payment and closing costs and may not be able to afford to make cosmetic or more expensive improvements to the property.

Clutter can keep buyers from seeing your home, and more importantly, it will keep them from seeing themselves in your home.  There are three basic causes of clutter: there is too much stuff in the home; there is not enough space in the home; and there is no organization.

Selling a home is about positioning it to sell which sometimes means temporarily or permanently getting rid of things that make the home look small or distracts the buyers from seeing its potential for them.

Terms are the financial preferences established by the seller.  In a competitive market with multiple bids, a seller may not have to offer any terms such as a financing, appraisal, or inspection contingencies.  This will restrict the number of buyers who are financially able to pay cash and are willing to do so.

In lower price range homes, there could be a wealth of qualified buyers that need to use low down payment options, closing cost assistance from the seller, or other things.  When the seller consents to offer a variety of terms, the market of potential buyers increases.  The seller can still select the most qualified if they are not limiting protected classes.

The fourth marketing factor that the seller controls is the agent they select to represent them in the sale of the home.  Selecting the "right" person to market your home is very important and worth careful consideration.

Your agent will be the manager of the entire marketing process. They'll position your home to be competitive with the other homes in your price range and area while attracting the broadest range of buyers possible.  Your agent will offer advice on what needs to be done before the property is offered for sale.  Your agent can also offer recommendations for a variety of service providers if work needs to be done.

There are a lot of professionals involved in the sale of a home like lenders, title officers, appraisers, inspectors, insurance agents, surveyors, and the buyer's agent, just to name a few.  Your listing agent will coordinate the communications between the other professionals and negotiate directly with them.  Your agent's role as third party negotiator is critical and you need to feel confident in their ability to serve your best interests.

  1. Price
    • Too high; not realistic
    • Doesn't acknowledge Internet search range
  2. Location
    • A poor location can negatively affect price
    • Since location cannot change, must adjust price for a poor location
    • Condition
    • Clutter
    • Drive-up appeal
    • Deferred maintenance
    • Odors
    • Carpets
    • Lack of updates
  3. Terms (applicable to certain price ranges)
    • Buyer concessions like closing costs
    • Incentives like home warranty, appliances, floor covering, etc.
    • Buy-down interest rates
  4. The Agent you select
    • Experience
    • Knowledge of neighborhood
    • Promotional expertise

For more information, download our Sellers Guide.

Tuesday, September 13, 2022

Gift Amount Increased for 2022



The limit for tax free gifts for 2022 is $16,000 and no tax is due to the donor or the donee.  There are provisions that would allow gifts higher than this amount providing the total lifetime gifts above the annual exclusion of $12.06 million for 2022 has not been met.

The donor and donee can be separate persons so that the aggregate tax-free gift for one-year amounts to more money.  For instance, a father and mother can gift $16,000 each to their married son in 2022 and an additional $16,000 each to the daughter-in-law for a total $64,000.

If the son and daughter-in-law used the money as a down payment to purchase a home, depending on how recent the gift occurred, the mortgage company might require a gift letter from the parents stating the amount was a gift and is not expected to be repaid.  Lenders may ask the exact amount of the gift, where it came from and the relationship involved.

Family members and friends with financial resources can become the catalyst that allows buyers with good credit and income but without a down payment to purchase a home.  Sometimes, the gift is looked at as an early inheritance that allows the recipient to show their gratitude and the donor to see the enjoyment and benefit of the gift.

In some situations, the buyers have saved enough money for a minimal down payment, but the gift allows them to put more money down that may help them get a lower interest rate or eliminate the need for private mortgage insurance.

The important thing involving gift funds is to have complete disclosure with the lender.  It is best discussed during the pre-approval process.  Your real estate professional should also know about it so they can guide you through the process.

Tuesday, September 6, 2022

Housing Affordability - Call to ARMs



Housing Affordability is negatively affected by both rising home prices and mortgage rates.  A 20% increase in nominal home prices and a 2% increase in the 30-year fixed rate mortgage since January have contributed to a 46 point drop in the NAR Housing Affordability Index.

The Index was 143 in June 2021 and is 98.5 in June of 2022. The Housing Affordability Index indicates whether a median income family can qualify for a mortgage loan with a 20% down payment and 25% qualifying ratio for monthly housing expenses to gross monthly income.

100 points is considered the tipping point.  As the Index rises above that point, housing is considered more affordable and as it declines, it is considered less affordable.

With affordability threatening to limit buyer's ability to purchase, more borrowers are considering an adjustable-rate mortgage.  For the last ten years, fixed-rate mortgages have been so low, only about 3% of borrowers used adjustable-rate mortgages.  

There is a lot of misinformation about ARMs that keeps some would-be buyers from even considering them.  Even before the housing crisis of 2007, many safeguards were put into place to protect borrowers.

"As long as the 'spread' between ARMs and fixed-rate mortgages continues, more first-time home buyers may choose ARMs because the lower mortgage rate gives them a purchasing power 'boost' over the 30-year fixed mortgage rate."  Mark Fleming, First American Chief Economist

The potential ARM candidate is probably not a first-time homebuyer.  They should be tolerant to risk and more financially savvy with predictably increasing income.  These buyers may recognize that they do not intend to stay in the home for a long time. 

Adjustable-rate mortgages, generally start out at a lower-rate than a fixed-rate but can adjust, up or down, based on an independent index plus a specified margin and anniversary date that are referenced in the note.  Most ARMs have stated interest rate caps that limit the amount of adjustment of the rate both on a periodic basis and a lifetime.  FHA ARMs have a limit of 1% per adjustment period and a 5% lifetime cap over the original note rate.  Conventional loans, more commonly, have a 2% per adjustment period and a 6% lifetime cap.

A particularly popular type of adjustable-rate mortgage is referred to as a 5/1 which means the rate for the first period lasts five years and then, each adjustment period after that is for one year.  This allows a buyer to have stability in the rate during the first five years.  If they plan to sell in less time than that, they will not have to deal with the adjustment.

A 5/1 ARM will have a lower payment for five years because of the lower initial rate and assuming a worst case scenario, a conventional ARM could increase a maximum of 2% at the end of the first period which would put the rate at higher than the fixed rate at the time they started.  However, that is not where the breakeven point occurs.  It is not until all the savings from the initial period have been exhausted, that the ARM will become more expensive than the fixed-rate alternative.

An ARM Comparison can help buyers to determine breakeven point.  Let's compare a 5.66% FRM with a 4.51% 5/1 ARM with 2 and 6 caps.  A $450,000 30-year term loan amount will have a P&I payment of $2,600.41 for the fixed compared to $2,286.76 for the ARM.  The $317.65 monthly savings will accumulate for 60 months plus a $6,673 lower unpaid balance on the ARM due to a lower interest rate. 

The total savings in the first period would be $25,732.  If you assume that the payment would increase to the maximum at each adjustment period, the breakeven point will occur at 7 years and 4 months.  If you were to sell the property prior to the breakeven, the ARM would produce a lower cost of housing. 

One of the benefits for lenders making adjustable-rate mortgages is that they have less risk because the yield can change to reflect the current market.  Most ARMs must adjust down as well as up which means if rates do come down, the buyer can continue with the ARM at a lower rate or convert it to a fixed-rate at the, then, current rate.

Use the ARM Comparison to see where the breakeven point will be for you.  Get mortgage rates for FRM and ARM mortgages from Freddie Mac and download our Buyers Guide.