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Author Archives: ARDELL
Green Living – Authenticity
Does your neighbor who just bought a “hybrid” car, complain when you hang clothes out to dry?
One of the things I like most about Seattle and The Pacific Northwest generally, is the sincere desire to improve. Improve the environment, improve the quality of life, not only for themselves but for those around them.
…and they can smell BS from a mile away!
Seems to me that every time the subject of Green Homes comes up, there’s some new and more costly “green” improvement. Or some “green” label that is supposed to make “the product” sell at a higher price as a result. A marketing “gimmick”.
I write this post in an effort to share “real” green living tips. I am so NOT a “green” expert, and I’m very hopeful that others will join in here. I am however a strong proponent of “Waste not; Want not” and rewarding people with “the right why”.
I grew up in the days when everyone hung their heaviest clothes out to dry. We had clothes dryers, but we were also conscious of how much energy it took to dry a pair of jeans. We also knew our jeans kept their color and lasted longer if we hung them to dry vs. putting them in the clothes dryer.
When my children were small, we had a huge vegetable garden. Way too many vegetables for us to eat ourselves. I remember having the girls fill up the little red wagon with cucumbers and tomatos and green peppers. We went door to door and gave each of our neighbors a few days worth of our produce. I also remember the surprise when the neighbors realized it wasn’t a “business” for the children, and the vegetables were gifts and free.
Given the state of the economy, I’d like to add a proponent of Cost Factor. My idea of “recovery” is to find a happy medium, not to get back to where we once were. I actually WANT the economy to stay down, and for people to adjust their lifestyle accordingly. The Age of Greed and Excess is over. Even for those with plenty of money, it is no longer fashionable to flaunt that fact. Even celebrities suddenly realize that every dollar they waste on more bling, would have been better spent feeding a hungry child.
Yes, businesses will fail. But maybe it’s time a business that sold a baked potato for $8 SHOULD fail. What did it cost them? A dime?
The #1 thing you can do is to be authentic in your approach. Don’t spend more for something just because you can finance it. (Yes, that includes real estate commissions.) Treat every dollar you make and spend as a “public trust” to improve the world around you. It’s a lofty goal and change doesn’t happen overnight. Instead of looking down your nose at a neighbor who hangs a pair of jeans on the line outside, look down your nose at a neighbor who has a beautiful lawn that they water twice a day.
1) Remove all clothesline bans
It always amazes me that the same people who don’t want the government putting restrictions on their lives, will be the first to complain if they see a neighbor hanging a sheet or blanket on a clothesline. I’m not sure why you never see people hanging clothes out on a nice day, but if it’s because they are “not allowed” to do that…change that.
2) Grow something from the seeds of that which you have already grown.
What a wonderful lesson for children. When my children were small, we always visited their great grandparents and great aunts and uncles who lived in another State in the Fall. I am reminded of this everytime I pass by the many marigolds on display today. We used to “bring the relatives home with us” by collecting the dead flower heads…the portion that contained the new seeds. We would put them in a paper bag when we collected them, and we would plant them the next spring at our home. While we only saw those relatives once a year, we added them to our daily lives and thoughts via “seed collecting”. Here’s a good “how to” on collecting seeds and having new plants from something you have already grown. I learned this from my mother. A wonderful tradition to hand down from generation to generation. My grandmother used to collect and cook dandelion greens (with sausage and pasta sauce), but I’m not sure we’re quite ready for that lesson 🙂
Another fabulous idea for a housewarming gift is to split your bulbs and bring a free and lasting gift to a new neighbor, or even plant them in your local traffic circle. You want to be careful to time this appropriately, as the “green” of the plant feeds the bulbs, so you don’t want to simply “dead head” and dig up when the blossom fades. But what a wonderful gift! Nature gives you abundance by mulitplying itself! Yet how often do we dig up the bulbs and plant this new gift of nature, vs. going to the local garden store to buy bulbs? Something to think about.
3) Get some exercise while helping someone in need
There is recently a huge public outcry regarding the unkempt appearance of homes in foreclosure. Sometimes the home is vacant. Sometimes the distressed homeowner is having difficulty paying their utility and trash bills. Even if the owner can go out and pile up the yard waste, they may not have the means of disposing that yard waste due to unpaid trash bills. (Recent example I have witnessed first hand.)
Every “help” organization: Senior Centers, Hopelink, any and all organizations that help the disabled, should have a list of people who can use a lending hand with their yardwork. If every person traded just one day at the gym, for some honest “helping hand” physical labor, the world would be a better place.
In many, many ways we are talking about replacing bad thoughts with good ones. Instead of complaining about the neighbor’s yard, assume there is a very good reason why they can’t do what they are not doing.
Don’t ever offer to “fix” someone’s something, as that is a negative “judgement”. Instead, ask if the neighbor might help YOU by allowing you to do some of their needed yardwork. Explain how you need more exercise, or how much you love to garden and you have no gardening left at your place that needs doing.
Remember that when you help someone, you do so by asking them to help you..because the real joy is in the giving.
What you may be missing about a short sale
Below is a simple diagram of a “normal” sale. Buyer makes offer AFTER verifying everything is in order to close, except the appraisal. Downpayment funds in bank? Check. Pre-approval for mortgage? Check. Cash for closing costs in bank? Check. Ready to make offer. Appraisal comes in at the sale price. Buyer ready to close.
We’re just following the money here. We don’t need to show the Earnest Money, as Earnest Money is not “additional” amounts needed by the buyer. It’s just an advance against monies later needed at escrow to close.
In the example of a “normal” sale, the amount provided by the buyer is in excess of the amount needed by the seller to pay all seller costs and payoff all monies owed on the property, including lienable utilities. As long as the amount offered exceeds the amount the seller needs, the sale closes.
Now let’s look at all the things that go wrong, creating a “short sale” situation, in the graph below.
First notice that the main reason the buyer is often impatient and confused is that everything the buyer does is exactly the same in a short sale as it is in a normal sale. Everything that goes wrong, and everything that may or may not be done to fix it, is out of the buyer’s control.
That is why you often see questions like:
1) How can I contact the seller’s creditors?
2) How can I contact the seller?
3) How can we find out exactly what is going on!?!?
Now look very closely at the diagram above. I want you to go to the last box on the right. Aha… that’s the part everyone seems to be missing.
Just because the value of a property is obviously less than the amount owed, that does not mean that the seller’s lienholder is going to approve the short sale. In most cases no one involved in the transaction knows what is in that last box. Escrow doesn’t know, the agents don’t know and very often everything proceeds for months as if what the seller has in assets and cash outside of the sale of the property is meaningless.
Now ask yourself this: You lend your friend $10,000 to buy a car. He decides to sell it when he still owes you $8,000. He tells you someone is willing to pay $5,000 for the car and he wants you to take $5,000 as payment in full. You look at his offer, you find out he he has $15,000 in a savings account. You find out the blue book value for the car is $6,500. The person who wants to buy the car for $5,000 is getting impatient wating for an answer. What would you do?
That’s a “short sale” pure and simple. Do you take the $5,000 because you can get it in a few days? Oh but wait, your friend won’t sell the car to get you the $5,000, unless you agree, in writing, that you won’t EVER come after him for the remaining $3,000 you owe him. Should you just take the car and try to sell it for the $6,500 or better, so that you can still collect the amount your friend owes you after you sell the car?
Tell me, what are the odds in that situation that you are going to say “sure, I’ll take the $5,000 and leave you alone”? If you know there is $15,000 in the bank AND the car is worth more than $5,000, why WOULD you say…sure, no problem.
Almost never do you see anyone talking about why the bank WOULD NOT approve the short sale, because they are always talking about how the bank should be happy to get a fraction of what is owed, and $60,000 or more less than what it’s worth.
But what about the owner’s money in the bank? What about the owner’s $120,000 income a year, but he moved and bought a new house and stopped making payments on the old house? What about the equity in the seller’s other house…oh and he made that big downpayment on his NEW house by refinancing (taking the cash out of) this one that is now short.
So if you are buying a short sale and are simply waiting for the bank to say yes, remember it sometimes takes a really long time for someone to say YES to something that they don’t want to say yes to. On the other hand if all you want is a fast answer, anyone can pressure the bank to say NO in a matter of days.
There’s a lot more to a short sale approval, and most of it has to do with whether or not the bank is willing to forgive the remaining debt, or the seller is willing to sign a note agreeing to pay the remaining debt.
No one asks this question, before they make an offer. No one knows the answer to this question while they are waiting for approval. Most of the time the delay is because the owner wants forgiveness of debt, and the lender needs the owner to prove current and long term “hardship” in order to release them from the future obligation to pay.
26 Days of No Rain in Seattle
Tomorrow will be Day 27 of No Rain in Seattle. The record for no rain in May and June is 29 days.
Are sales really “failing” to sell?
(From near the end of this post: “Looks like of the 1,081 combined pendings since 6/1/09, at least 21% are short sales. But of the 1,379 closed in 30 days, less than 2% were closed short sales.”) Read full post for more info. That indicates a HUGE failure rate on Short Sales, though some of the variance could be attributed to other factors.
It seems that since the mls removed STI (subject to inspection) as a status, more pendings are failing. Is this partly because we are now counting the same property twice, and so only 1 closing for 2 pendings in many cases?
1) IF it is first “Pending Inspection” or “Pending Feasibility” study – Every house that is put into “pending subject to inspection” will “fall out” into “pending”, before it goes to “Closed”.
2) Likewise a large number of bank-owned sales are previous listings that may have been pending as short sales. They DO sell, but by the bank seller vs the owner occupant seller. The house IS sold at the end of the day. We are just showing two pendings for that one sale, with one closing and the other one “failing”, due to the change of seller name from owner to bank.
The only way for us to know this is to track them differently going forward. There is no way to get prior stats of the switch out from Pending Inspection to Pending or failed short sale = closed bank-owned sale, without looking inside each transaction by hand. Too cumbersome. But in recent history I believe these are clearly marked and can be identified for individual study, so if we begin now, we should have some really good data as time moves forward.
Today is the first day of the rest of our…research. Let’s begin on the “right foot”.
I’m going to go to the beginning of June, assuming anything that “went Pending” on June 1 hasn’t closed yet. We can turn it into graphs after several weeks of raw data are obtained. Sticking to “Residential Only” (which in Seattle includes townhomes and on the Eastside does not, by and large). Most stats available are for SFH, such as on Seattle Bubble, so I will exclude “condo” and other types of property. I will also exclude manufactured/mobile homes and houseboats, which may have different #fail as to finance issues. There is also a status called “Pending BU Requested” which indicates the agent is thinking the buyer in escrow may not close and is looking for BU offers. I am going to show them separately as they don’t “fall out” into another Pending status before going to Closed…but should indicate a higher expectancy that the sale will fail.
In future posts containing these Pending stats, I will link to this post and not repeat the parameters each time. If anyone disagrees with the parameters, speak up so we can make the changes at the beginning together.
King County: Went Pending since June 1:
Pending = 456 (PI – 499, PF – 6, PBU – 120)
Note: a property can’t have two statuses at the same time. So the 456 “true” pendings, are not also contained in the other categories. PI used to be STI-subject to inspection. PBU is generally reserved for properties expected not to close with the current buyer who is in escrow. PF always had a high fail rate as the buyer is saying I only want to buy it IF…”. PI and PF should eventually move to “Pending” and only counted there. PBU we will try to break down further:
89 of the 120 PBU (Pending BackUps) are noted as “Short Sales”
7 more appear to be short sales, but some with prior lienholder approval
Many of the remaining properties in PBU are also short sales, but the field is new and some are not yet using it properly, especially if the property went pending since 6/1/09 BUT was listed long before the SS field was implemented. This data should improve over time. For now note that MOST of the 120 PBUs are Short Sales.
In addition, at least 135 of the 499 Pending Inspections are Short Sales.
Closed in the last 30 days – 1,379
Best I can tell, given pendings are closing in longer and undertermined timeframes, we can’t study a relationship between recent pendings and closed sales. Unless someone has some ideas here.
But at least we can track and see if the “true and full” Pendings are increasing or decreasing, if the short sales are increasing or decreasing.
Let me check for one more thing. How many of those closed sales were noted as Short Sales. WOW! only about 24. There you go…as I’ve said before, A Short Sale is not necessarily for sale!
Looks like of the 1,081 of combined pendings since 6/1/09, at least 21% are short sales. But of the 1,379 closed in 30 days, less than 2% were closed short sales. I’m going to leave this here, but also bring it up to the first paragraph.
Now that you can see how we will be able to break down the stats into the future, your thoughts on meaningful arrangement of data much appreciated.
Seems to me we need to note closed since 6/1 here (451) as Pendings will drop as they are Closed.
The primary purpose of this post is to show you what data is available, so that you can request a customized format in the comments below this post. (I am going to tag this “Sunday Night Stats”, just so that tag will pull up the full year and a half of my data related posts. You can get more data in this link of Tracking the Market.)
Required disclosure Stats are not compiled, verified or posted by NWMLS
UPDATE: I am compiling median prices and price per square foot of “normal” sales vs. short sales and bank owned. I just found a drop down vs. check box for identifying bank owned properties. … link HERE to the additional data . Breaking it down to North King vs. South King. There is a huge variance in pricing and the distressed sales are not dragging down other property sales “to their level”. Though I do think as time goes forward, identification of distressed sales will be more and more accurate as the new required field is used often and properly from here forward.
Is “fiduciary” level of care “old school”?
I would not respect a doctor who would hand me three phone numbers of his/her patients, who just had a recent surgery, as “references”.
While it’s true that highest degree of confidentiality is a fiduciary duty, and WA has statutory vs. fiduciary duties, I just can’t honor the request of people who want me to “use” my past clients as “references”. Using your client for your own benefit is such an anti-fiduciary concept.
Some time ago I received an email from a total stranger seeking to hire me as his buyer’s agent. He asked for a complete list of all of my client’s names, addresses, email addresses and phone numbers prior to our meeting. I responded that he should think very hard about hiring anyone to represent him in a client relationship, who would acquiesce to that request. The issue has come up again, and while I fully appreciate a person’s need to “check references”, I still won’t give out personal info of my past or present clients.
Once I connected two of my clients by asking a former client to have lunch with a current client. The former client was a whiz at hunting down the absolute best loan available. They worked for the same Company. They were about the same age and neither had extensive local contacts, both having relocated here and away from their family and friends. I was careful to not give out any info of either party until they both agreed to the lunch, which I did not attend so as to be absolutely certain I would not reveal anything about one to the other. Asking one client to help another client is not the same as asking my clients to help me GET new clients. I just cannot get my brain around that concept.
I turned 55 the other day and Craig Blackmon’s recent remark that I am “an old war horse” is reverberating in my ears at high volume. I became “a fiduciary” for the first time back in 1974. We were constantly warned about never going out to lunch with a colleague and discussing a client by name in a restaurant. It was the blackest of mortal sins to use a client’s last name in public, and if they had an unusual first name like mine, no first names either. To this day even when my partner Kim and I speak of clients, we never use last names even to one another. Clearly my age is having an impact, as we seem to be treating all of our clients as if they are our children. “Honey, the kids are coming over to sign the papers in an hour!” [I yell up the stairs]
In many ways, people reveal more about their personal lives to me, than they do their doctor or lawyer. Regardless of whether or not the State views me as a “salesperson” or holds me to a fiduciary standard, I’ve just been a fiduciary for way too long to erase that concept from Who I Am. Fiduciary = “without regard to self interest”. So while it is perfectly acceptable and understandable for someone to “want references”, it is just not possible for me to accommodate that request. Many agents have argued with me that I am wrong, old school, old fashioned, etc… Well, maybe turning 55 comes with the convenience of being allowed to be “an old war horse”.
The Dream Home You May Never Own
Blythe Lawrence over at The Seattle Times asked me to write a little something about “people who fall in love with a particular house or houses and eagerly wait (sometimes for years) for them to go on the market.”
Have you ever “stalked” a home? Blythe’s request reminded of a time when I lived and worked in the little town of Newtown Borough, Pennsylvania, which was laid out by William Penn in 1682.. The town was chock full of historic and unique homes of varying styles, shapes and sizes. It was not uncommon for people to schedule their daily walks past their favorite houses and dream of some day owning “The big yellow house” or “the Grand Home near the Buck Hotel”.
Fairly often people would come to me and say “if the yellow house ever goes up for sale, can you let me know?” The yellow house was just about everyone’s favorite. More often people would come to my office wondering if any of their favorite homes, of which there were many, might be coming up for sale. Being a rather bold person myself, I would say, “Well, why don’t we take a walk around town and you can point to all of the homes you like, and I’ll write down the addresses. Then we’ll just knock on the door and ask the people if they are thinking about moving. Or you can write them a letter complimenting their home and ask them to please let you know if they are ever thinking about selling. It always surprised me when they didn’t want to do that.
As Blythe pointed out in her email, more often people become “Real Estalkers” walking by the house almost every day. Dreaming that one of their favorites would one day have a “For Sale” sign out front and they would buy it. I thought it was pretty simple to just write them all and find out…but I realized that people didn’t want to know that NONE of their favorite houses would be coming on market. They didn’t want to shatter their dream that someday soon it would. They didn’t want to spoil their morning walks fantasizing about the possibility.
Do you have any stories for Blythe? Have you ever stalked a home hoping it would someday be for sale, and then eventually buy it? Seems to me Rhonda Porter may have stalked and found her dream home. Blythe is planning to write a little something on this on Thursday, so if you have any stories for her, please post them here in the comments.
Thank you.
5 Reasons Guys Dump(on) Houses They Like
Why Guys Dump Girls They Dig is one of the featured articles on msn homepage this morning. I couldn’t help but notice that the 5 reasons noted in the article had a striking resemblance to how men react when home shopping with their wife or fiance.
For agents who ask “why won’t buyers get off the fence” or “why doesn’t the buyer want to see homes with an agent”, my slight modification of the msn article might offer some insight.
1. The Timing Is Off – “I ended it because I didn’t want to commit…right then.”
Often agents will scratch their heads saying “if they weren’t ready to buy a house, why are they looking at houses?” When a single guy or single girl is buying a property on their own, they often don’t start looking until they are ready to buy. BUT when there is a couple involved, often the man is going along…and enjoying the looking process…but not ready to make a commitment.
Generally speaking, a man doesn’t like to say “no” during the day to the woman he plans to sleep with that night. So he says yes…let’s go look at houses, and then he continues to gather information, sometimes for years. Looking and actually buying are not one in the same, and sometimes not even related one to another, in the man’s thinking and acting process. Just like dating and marrying are clearly NOT part of the same thinking process.
Looking, researching and actually buying one, are not one in the same for a man. Fear of commitment doesn’t enter into the picture until the woman wants to actually BUY one of the properties. That is why it is important that an agent NOT just fax an offer to the couple for signatures. Watching how the people react to signing the contract is very important to protecting your client’s best interests. If the man (or the woman) seems to be signing reluctantly and “going along” to please the spouse or girlfriend/boyfriend, it is the agent’s job to help them take a step back, until they are fully ready to purchase.
2. We’re Not Finished Playing the Field (Looking)- “The moral of the story: Until we mark everything off our checklists, or have too many friends convince us that we can’t do better, the flight risk is real.”
A man is less likely to stop and buy early in the process than a woman. A woman will often want to make an offer on one of the first properties they like. Women enjoy the buying and getting into it part, more than the “looking at” and “gathering information” part. At the onset the men and women are evenly excited about looking, but the woman usually gets to “let’s buy this one” earlier.
If the man is not finished “playing the field”, looking, researching, consulting with friends, etc…he is more likely to find a defect in the property pointing to why he can’t buy it, than admit that he is just not ready to leave the “looking” stage yet.
3. We’re Fixated on the Worst-Case Scenario – “Blame our friends who took the plunge (bought homes) before us, but many guys are hyperaware of what could go wrong down the road.”
Very often, once a potential home to buy is identified, the man comes back many times, emails many questions, calls 4 times a day, and the woman seems to disappear from the equation until the property closes escrow. The woman is often done once the decision to make an offer has been made. She is thinking about buying towels that match the bathroom. She is mostly concerned with the seller accepting the offer, so she can start planning the move.
A man on the other hand is just getting started once the home they want to buy is indentified. Actually getting it is the least of his concerns (except in #5 below). The weight of the consequence of actually buying vs. looking is ENORMOUS at this point. The decision to make an offer is a beginning point of the new “worst case scenario” cycle. What will the payment actually be? (unknown until you can lock the rate AFTER you are in escrow.) What major expenses can I expect that are currently unforseen? (unknown until after in escrow when you do the home inspection.)
The process of buying a home places some of the pertinent facts out of the man’s reach and during the escrow phase. This is VERY uncomfortable for most men who like all the details to be pinned down before he makes a real commitment. Knowing he has a legal out if he doesn’t like the inspection is little comfort. Knowing he can lock his rate before he loses his legal out on the inspection clause is little comfort.
Panic ensues because the process will automatically back him into a corner of having a near term drop dead date to cancel, or be obligated to buy the house, or lose his Earnest Money. Having only five to ten days to consider all previously unknown factors, and cancel or not during that time, seems absurd to most men. It produces sleepless nights and profuse sweating in many cases. Rightly so…I say. As an agent, helping him to predict all worst case scenarios prior to offer, makes the client’s life a LOT easier when the actual info comes in better than the anticipated worst case scenarios identified in advance of the offer.
4. We’re in Like, Not in Love – “It’s harsh but true. In fact, it’s probably the most common reason we bolt.”
This one is self explanatory and most men do not want to be in LOVE with a property…EVER! They want a purchase decision to be free of emotional influence. They want it to be a sound financial move and not an impulse buy. The problems arise when their woman is in LOVE with the house, and the man is trying to hold on to being unemotional about the purchase and the process.
5. We’re Too into You (it) – “Guys are protective of their emotions. Translation: We’re scared spitless of being hurt. So, if we start to feel like we’re getting into a situation where we’ll be destroyed…we might launch a preemptive strike and yank the plug first.”
Multiple Offers about says it all. Men rarely like to get involved in an offer if they know there are other offers. They are equally afraid of getting it, as they are of not getting it. They are equally afraid of houses without other offers (why hasn’t anyone else made an offer on this house?) In many ways men are more likely to get through the process on a property they don’t LOVE, than one they do love.
This last one is very important for agents to understand. When a man really wants the house, you usually don’t know it until about 4 days before it closes. Sometimes it’s the first time you seem him smile and get excited. He doesn’t emotionally connect with the home until all potential obstacles are behind him. Sometimes that doesn’t happen until he has the keys in his hand 🙂
Zillow Blog:Tim Geithner says Rent vs. Sell
Very interesting article on the Zillow Blog about Tim Geithner’s home shown above.
I disagree with Whitney’s comment: “Treasury Secretary Tim Geithner claims to see signs of economic improvement for the nation, but the same does not appear to be true for his personal pocket book.”
Whitney, if Geithner thought the market was NOT currently improving and did NOT believe in the upward tend, he would be selling it now vs. renting it. By taking it off the market and renting it, he is confirming his belief that he sees “signs of economic improvement”, not the other way around.
Good Faith Estimate – Protecting Your Earnest Money
Protecting your Earnest Money Deposit starts before your offer is written. I highly suggest you do the following, before going out to look at homes for sale. It’s a little unorthodox, but very effective.
1) Ask your lender to base your pre-approval on the current interest rate PLUS. I’d say +.50% to +.75% at this time. Use the higher number if the going rate is 5% or less at the time of the pre-approval. If the going rate is 5% (rates move in 1/8ths) have the lender qualify you as if the rate is 5.75%. Give yourself a little breathing room for rates to fluctuate while you are looking at property and making offers. You don’t want the fact that rates are moving up, to stress you into making bad choices about other things, during the process.
Example: If you have salaried income of $95,000, you qualify for a payment of roughly $2,375 if the rate is 5%. Take the $375 off for taxes and insurance, and make sure you check that $375 a month against the taxes on the house you make an offer on later in the process, and the amount the lender assumed as the taxes when doing the pre-approval letter.
After deducting RE taxes and Insurance, we are looking at a monthly payment for Principal and Interest of $2,000 which gives you a loan of $372,500 at 5% and a loan of $342,700 at 5.75%. If you are planning to use an FHA loan, deduct $5,500 for the upfront MIP that you are likely going to finance, and that gives you a loan amount range of $337,200 to $367,000, depending on the interest rate at the time you lock it. Add the 3.5% downpayment, and you are looking at a sale price of about $355,000 to $385,000.
Remember that your approval is based on a % of your gross income and you qualify for a monthly payment, not for a sale price. So if you qualified for a house price of $385,000 (and the letter is absolute max within the lender’s assumptions), and they assumed taxes and insurance of $375 and the real taxes and insurance are $500, you no longer qualify for the sale price on your pre-approval letter. Likewise, if they used an interest rate of 4.875% and maxed out the price of home based on that rate, and rates are 5.125% when you lock, you won’t qualify at the sale price noted on your preapproval letter.
By asking the lender to use current rate PLUS X when issuing the preapproval, you can worry less about rates fluctuating while you are busy trying to find the right house, and making the best deal.
These days, the very best deal OFTEN has RE Taxes higher than the amount assumed when producing your preapproval letter, making this issue of importance moreso now than it has been in the last 10 years. Plus lending guidelines are stricter, so a slight variance out of the assumptions can clearly make the difference between loan approval and denial, moreso now than in the last 3-5 years.
Make sure your pre-approval is based on a higher interest rate than today’s “going rate” and higher annual real estate taxes. The reason this is MORE important today is many people are buying short sales and foreclosures. The better the “deal”, the more likely annual real estate taxes are going to be higher than a lender will estimate as an area average for that purchase price. So if you are Woo-Hooing about the fabulous price you just negotiated, it’s a good sign you need to check the ACTUAL RE Taxes against the lender’s original assumed monthly tax amount.
2) Get a Good Faith Estimate along with your pre-approval letter. Before you even begin to look at property, you want to be sure you have the total cash you will need to close escrow. While a Finance Contingency may protect you if Step 1) is done incorrectly, it will not protect you if you do not have the funds to close escrow. If your loan is approved, but you can’t close because you don’t have the amount of money escrow tells you to bring to closing, the Finance Contingency will not protect your Earnest Money.
Again, this is a little unorthodox, but I have found this method to be essentially foolproof. So much so, that I have been able to guarantee that there will be no surprises at closing, unless the buyer elects to buy down the interest rate for reasons other than needing to do so to qualify.
Don’t just look at the bottom line monthly payment, interest rate and cash to close on your Good Faith Estimate (GFE). Turn it into a “working” document by converting the format to the official HUD 1 you will see at closing. This gives you the added comfort of seeing BEFORE you start looking at homes, exactly the same Closing Statement you will be facing the day you go to sign your closing papers.
Find a blank HUD 1 and print it out. I always do these numbers by hand in blue ink, so I can clearly differentiate it from the forms that come later in the process. I have seen many and varied formats for Good Faith Estimates over the last 20 years, but the final closing statement, the HUD 1, has been virtually the same from year to year and even from State ot State.
I just printed one out directly from the HUD website. Always round the numbers up, and get the numbers directly from the source as much as possible. I expect lenders to be absolutely accurate when “estimating” their own charges, so the lender fees on the Good Faith Estimate should be accurate. BUT when they are estimating 3rd party costs on the Good Faith Estimate, such as Title and Escrow charges and even County recording fees, I often find those numbers to be underestimated. Remember to add the Home Inspection fee, which is almost never on a GFE.
Every time a sale closes, I double check the actual costs against my own original estimates. By getting your numbers directly from the source, and rounding up, you will not likely have any surprises at closing, in fact most often, the amount you need to bring should be less than you originally anticipated.
Always use worst case scenario when calculating your monthly payment and your Cash needed to Close BEFORE you go out looking for homes. This will insure that your real case scenario will always be brighter by comparison.
VERY IMPORTANT: If you do not have enough cash to close, that often means the agent needs to include a credit toward closing from seller to buyer IN THE OFFER. So doing this after you are in escrow…is too late.
Often there will be changes DURING the process that can throw these numbers off. By doing the numbers yourself, by hand, as I do, the little red flags will pop up as changes are proposed during the process.
EXAMPLE 1: Closing date is the 25th of the month, so the cash to close on your Good Faith Estimate has 6 days of interest at $55 a day = $330.00.
Two days before closing the seller asks you to extend close to the 11th of the next month instead. These discussions happen all the time WITHOUT the buyer knowing that the $330 for 6 days interest will increase to 20 days at $55 a day or $660. In reality it costs you less, but for practical purposes it costs you more with regard to “cash needed to close”. ALSO, often the lender doesn’t know the date was extended until they are sent the addedum changing the close date AFTER both the buyer and seller have signed agreeing to that change. If they only locked the rate to the day of closing or until the 3rd or 5th of the next month, you could end up with a different interest rate by signing the close date extension, and in this period of volatile rates they will likely hold you to the HIGHER of the two rates.
Again, if you are buying a short sale or bank owned property, the extension of close date may not be something within your control. You can’t MAKE the seller close on a given day, regardless of contract provisions. So being qualified from the beginning at a higher rate becomes a necessity vs. a preference, if you plan to close escrow.
EXAMPLE 2: You receive your Good Faith Estimate and it says you qualify for a sale price of $300,000. It says your total costs will be $13,000 of which $5,000 is up front MIP, which will be financed. Total cash needed to close is $18,500 and you have $15,000.
Two months later you make an offer on a property and it is accepted. No one told the agent that the approval assumed the seller would be paying $3,500 toward the closing costs, and it is now too late to rework the agreement with the seller. Escrow fails for insufficient funds to close, and seller keeps the Earnest Money which is more than the $3,500 you needed to complete the transaction. You don’t get the house AND you lose $5,000.
It is very important that you turn your Good Faith Estimate into a working document, and not just file it away as another piece of paper. THE AGENT WRITING YOUR OFFER DOES NOT GET THE GOOD FAITH ESTIMATE, unless you personally give it to them, or instruct your lender to send it to them. There are many assumptions made by the lender when producing a pre-approval letter. If the real facts don’t match those assumptions at time of offer and acceptance, it will likely be too late to turn back the clock, and that can put your Earnest Money at risk.