FAQ: Seller Subsidies/Contributions to Closing Costs

I'm often asked how seller subsidies, (also known as “seller contributions” or “closing cost assistance,” work. When a buyer purchases a property, he can expect closing costs of about 3% of the transaction price. (This varies widely by jurisdiction—consult a local REALTOR for more details.) The closing costs are a combination of (1) fees to lenders, brokers, appraisers, and attorneys, and (2) prepaid expenses, e.g., paid-in-advance property taxes or hazard insurance. Many of the prepaid charges vary depending on the day and month in which you settle. For example, if you settle on the 25^th of the month, you typically pre-pay 5 days of interest, whereas if you settle on the 10^th of the month, you typically pre-pay 20 days of interest. For this reason, if a buyer needs to keep closing costs low, it sometimes pays to negotiate an end-of-month settlement. As a general rule, buyers cannot finance closing costs, so a buyer needs to show up at settlement with funds for both their down-payment as well as their closing costs.

Closing costs come off of the seller’s “net” or the amount of proceeds after expenses. Let’s say the seller is listing his home for $450,000 and his selling expenses (fees, etc.) are equal to 8% of the transaction. If he were to receive his full asking price, his “net” would be 92% of the total, or $414,000. In this example, the buyer would need to pay $13,500 in closing costs (3%) + his down-payment.

One negotiation tactic that is very common in this buyer’s market is to ask the seller to pay a buyer’s closing cost ($13,500 in our example), so that the buyer minimizes the amount of cash they need to spend to get into the house. The buyer may actually have the cash, but might prefer to hold onto it as savings, or apply to his down-payment, remodel a bathroom, to buy furniture, or whatever. Tip: You may see “seller contribution” clearly advertised in a listing—don’t let this drive your decision too much—in this market, almost any seller would be happy to contribute to your closing costs whether they advertise it or not. By stating it in a listing, though, in essence these sellers are simply saying “I’m willing to take less than list price.”

Now, getting back to our example, let’s say that a buyer wants to make an offer on that $450,000 home, but after discussing it with his agent, wants to pay only $430,000. (And for purposes of this example, let’s assume that the seller wants to “net” the fair market value of $430,000.) The buyer may offer less, or may ask for closing cost assistance, or a combination. So if the buyer wants his closing costs paid for, he might offer $443,500 and ask for a seller contribution to closing costs of $13,500. The seller then nets $430,000. The buyer would borrow the full $443,500—in essence “financing” his closing costs across the life of the mortgage—but would only need to write a check for the down-payment at closing.

Taking it one step further, if a buyer were to ask for both a price concession AND closing cost assistance, the seller would apply both to his net. In our example, it’s unlikely the seller would accept an offer of $430,000 AND provide a full $13,500 contribution because his net would only be $416,500 rather than the market value of $430,000.

From a buyer’s perspective, asking for closing costs is a good way to minimize cash out-of-pocket in the short term, but the trade off is that the buyer is paying interest (via the higher mortgage) for potentially years. Be careful, though—many lenders have a limit of how much a seller can contribute; they want you to have some “skin in the game” in today’s market! Additionally, review your contract carefully—sometimes any excess contribution is returned to the seller.

From the seller’s perspective, the financial difference of giving a price concession or a closing cost contribution is usually immaterial—the impact to the net is essentially the same. (The only difference is that any fees that are based on a percentage of the transaction price will be slightly higher; in our example, they would be based on the $443,500, and not the net of $430,000. Still likely a very small price to pay to get a buyer to the table!)

2008 Regional Outlook: "Fundamentals Sound"

George Mason University has updated their 2008 Outlook for the Washington, DC, metro area. It’s fairly consistent with previous presentations (perhaps slightly more positive, in my opinion.) Here are the key findings:

• Local job market continues to be very strong, with Washington, DC, having the lowest unemployment rate of the largest 15 job markets (US average = 4.4%, DC = 3.1%.) (See slide 5.) As I have commented here before, the job market is a great indicator of the housing market to come—people go where the jobs are, and they need a place to live. Because this area doesn’t have particularly high vacancy rates in rentals, that translates into pressure on rents (thus providing an incentive for renters to buy), or more demand for homes.
• This area has significantly fewer foreclosures (as measured per 10,000 units) than most large metropolitan areas in Florida, California, and the rust belt. DC (22), Arlington (27), and Alexandria (34) have the fewest foreclosures of any local county. (See slide 13) Think about those numbers for a minute. For every 10,000 homes in the District, just 22 are in foreclosure. This is consistent with other posts I’ve made about this area having two different markets—close in neighborhoods versus outlying suburbs.
• Days on market has increased significantly. (However, this can easily be misinterpreted—see my post on “Some Sellers Get It—And Get It In 30 Days!” Total units sold have declined (duh). Total active listings have increased (again, duh.)
• Percentage change in inventories has slowed dramatically and is consistent with 2003 levels. (See slide 23). We still have quite a backlog to work through, but at least for now it doesn’t appear to be getting any worse.
• Outlook: “Fundamentals are sound, 2008 will be moderately better than 2007.” (And by “better,” of course, they mean better for sellers.) “Housing prices will be flat until at least Spring & will be a mixed story across the region—some jurisdictions will be negative and others showing increases.”

So in summary, all real estate is local, and the DC market is, all things considered, not a bad place to be right now.

(If you found this interesting, see my related post: When will the DC real estate market turnaround?)

Some Sellers Do "Get It" - And Get it in 30 days!

The average Days on Market (DOM) is a good yardstick to measure whether housing inventory is moving. Generally, the higher that number goes, the more leverage a buyer has in negotiating. As the number ticks up, sellers get more and more anxious; buyers start to think: “What’s wrong with that house that it’s been on so long?”

There are two DOM statistics – Days on Market (MLS) and Days on Market (Property), or DOMM and DOMP. DOMM measures the days that a property has a particular MLS code attached to it. The MLS code is a two letter county abbreviation and 7 digit number, so something like AR1234567. DOMP measures the days that a physical address has been listed (though there are ways to cheat the system on this.) DOMP is a better indicator for buyers to use.

The average DOMP for active listings in Arlington right now is 107. (The average DOMM is 87, FYI.) That means, on average, each listing has been sitting for over 3 months. Looks pretty heavily in the buyer’s favor, right? Sellers appear to just not understand that they’re priced too high. But let’s look closer.

Looking at the 174 successful settlements for October 2007 in Arlington, I’ve graphed how long they were on the market prior to sale. We can see from this chart that the average of 107 (which would fall into the last column) isn’t a good representation of “successful” sellers. In fact, 45% of successful sellers had a contract in under a month, and almost 60% had a contract in under 60 days!

What are the implications of this?

• There are buyers out there for properties that are priced correctly.

• If a property is priced correctly—that is, the sellers “get it,” there is a good chance it will be under contract in 30 days, and a very good chance it will sell in under 60.

• On the other hand, for those sellers that don’t “get it”, the property will very likely sit for a long time—over 4 months. Right now there are 295 active listings in Arlington that have been on for over 4 months. In October, 34 settlements had a DOMP of that long. That means only 34 of 329, or about 10%, sold. Sellers, if you've been on for over 4 months you have only a 10% chance of selling. If you list a home and think, well we'll have an offer in 3 or 4 months--you're just not getting it!

In summary:

• Sellers – Price it right quickly, and it will sell quickly. There are buyers out there, but they are savvy and demanding.

• Buyers – Don’t assume that you have 3 months to make up your mind on that home you love—it could very well be gone if the seller already "gets it." If it’s priced well, the market will respond accordingly. How will you know if it’s competitively priced? Work with an agent, track micro-markets, and be actively looking in those micro-markets. Looking at an “average” won’t be enough.

Tax Tips for Home Buyers

Buying a home can bring a number of changes into your life, including financial ones. But for first time home buyers, those financial changes can be good news, especially at tax time. Most people know that there are significant tax benefits to buying a home, but often aren't clear on exactly what's deductible. So as 2007 winds down, I've compiled this brief list of tax benefits related to a home purchase. Not all deductions apply to every situation, of course, so think of this as a list of things to discuss with your tax advisor.

Mortgage Interest – Most homeowners are well aware of the mortgage interest deduction, as this is typically a large amount that makes the decision to itemize on Schedule A a no-brainer. You’ll receive a Form 1098 from your bank with the amount you can deduct on Schedule A. For most first time borrowers, but bulk of your mortgage payments for the first few years are mostly interest, so this one adds up quickly! Interest on second trusts and Home Equity Lines of Credit (HELs or HELOCs) are also deductible within certain guidelines. (Note: If you find that you are receiving a very large refund, you may wish to adjust your withholding using the IRS’ calculator here. )

PMI - Private Mortgage Insurance (PMI) is now tax deductible. But look out - this only applies to loans originated in 2007, so not everyone will benefit. There are also income limitations, and at least so far, this is just a one-year deal, so don't assume you can deduct it in 2008 and beyond. (Update Dec 2007: Congress extended the deduction for mortgages originating between 2007 -2010. Families with AGI up to $100K are eligible for the deduction, with the deduction being phased out up to an AGI of $109K.)

Points – Points—that is, mortgage interest that you prepaid at settlement—are also deductible. A point is equal to 1% of the amount borrowed. This one may or may not be on your 1098, but will be on your HUD-1 settlement statement from your closing. Can’t find your settlement statement? Ask you agent or settlement attorney for another copy. Some agents (myself included) automatically mail another copy to clients in the beginning of the year following the purchase. If you refinanced this year, then points can be deducted over the life of the mortgage.

Property Taxes – Your real estate taxes will also be deductible on Schedule A. It's easy to forget this deduction because most lenders collect it from borrowers as part of their monthly mortgage payment, and pay the local jurisdiction on their behalf. If you’ve prepaid, then the payment is deductible in the year of actual payment. So don’t forget to check that settlement statement to see if you prepaid any taxes that your lender may not be reporting!

District of Columbia First Time Buyers - First time buyers that settle on a purchase in DC before December 31 may get a $5000 credit (not a deduction--an actual dollar for dollar offset on money owed!) on your Federal Taxes. That's the same as Uncle Sam giving you $5000 of your hard earned money back just as a 'thank you' for buying in the District. Use IRS Form 8859. Also, DC buyers—don’t forget to apply for the homestead exemption that exempts the first $60,000 of value of your primary residence from property taxes.

Relocations – If you moved as a result of a job change, many of your unreimbursed moving costs may be deductible.

Upgrades and Updates to Your Home – If you made certain energy-efficient updates to your home in 2007, including high efficiency HVACs, new windows or doors, or tankless hot water heaters, you can qualify for a tax credit. Read more here.

Capital Gains – The first $250,000 in profits from the sale of your home ($500,000 if married filing jointly) is generally tax-exempt if the property was your primary residence for two of the last five years.

Now for the bad news: Some costs are yours alone—don’t try to deduct these expenses: HOA or Condo dues (though the property tax portion of co-op fees may be deductible--consult a tax advisor), property insurance, depreciation, general closing costs, repairs and maintenance, or local assessments that increase the value of your neighborhood (like installing sidewalks.) But hold on to any receipts; certain property improvements add to the basis of your home, and can help exempt profits when you sell.

While organizing all of the paperwork may take a little more time than was required when renting, the result is well worth it for most new homeowners. You may be pleasantly surprised with the difference in amount owed versus what you paid as a renter. Think of it as Uncle Sam's way of subsidizing your housing payment.

General disclaimer: This advice is not intended to apply to all situations, as exceptions and limitations apply. Please consult a tax advisor for your personal situation. IRS guidance can be found at www.irs.gov

When Will the DC Real Estate Market Turnaround?

March 22, 2008.

I'm just kidding, of course. I wish I had a crystal ball to be able to answer that directly. No one knows for sure, of course; it ranges from the NAHB's projection of 2008 (ever notice how industry projections are always six months from the date of the projection??) to this Barron's projection of 2011.

Lots of people are confident that this is part of a normal and predictable cycle. Everyone knows that real estate moves in 7 year cycles as in this article. Or maybe you believe in Hoyt's 18 year cycles, as described here. On the other hand, you can be confident this is part of the 50-60 year cycle, shown here. This one is my favorite: it's all aligned with the nodes of the moon, which means it's an 18-20 year cycle.

So there you have it: the market will turn in either 1, 3, 7, 18, 20, 50 or 60 years. Everyone all clear on that?

But when do you start counting the years? This article from May 2005 says that the bubble won't pop at all until 2009-1010. My point is simply that you can read predictions far and wide, and they're just that: predictions--but no consensus, at least not yet.

National projections don't mean much to an individual market though. In our case, the good news in this area is that the Washington, DC, area is often considered a contender to be the first to turn around (see article here) because of its extraordinarily strong job market and relative, i.e., long-term, housing shortage (see slide 38 of GMU study here.) and also my commentary here.

So is this a good time to buy? Maybe, maybe not. It depends on your particular situation. Buyers should think of the following criteria:

(1) Renting as an alternative: Do the financial analysis of rent-vs-buy using this calculator. Consider the mortgage interest and property tax deductions, the alternative use of funds (assuming you invest them, not spend them), and capital gains exclusion on sale.

(2) Stability: Is your financial situation stable for the next 3 years? e.g., Is your job secure? Are you expecting any life changes like marriage or children that might prompt a move? If you're not going to live in the property at least 3 years, it's nearly impossible to break even in this market due to transaction costs.

(3) Responsibility: Do you want the responsibility of owning a home? The maintenance headaches all become yours, but so do the benefits like stable payments (depending on your mortgage type), the ability to paint or remodel, permission to have a pet, getting away from your current neighbors, and building a "home" with furniture that you didn't have in college. (I moved 10 times in 10 years prior to buying my home--boy was I ready to not move again!)

Once a buyer has considered these points, it may make sense to at least start the process. Depending on which areas you are searching, you may find that the market is trending flat or even up. This is particularly true in areas that are close-in to major job markets (e.g., parts of Northwest DC and Arlington). It takes a buyer months to get to know a particular neighborhoods they're searching, and after that it gets easier to recognize a property that is a good value versus the other inventory--the trick is that you have to be ready to jump on it when you see it, and that takes some prep time.

If you're considering starting your search, contact me to discuss specifics on neighborhoods, and whether it makes sense to buy now or wait.

Negotiating a December or January Settlement?

Then this post will tell you how to potentially save a few thousand dollars in closing costs. Beginning January 1, 2008, the grantor's tax (charged to the seller) will increase from $1 to $5 per $1000 in value (so on a $500,000 home, the seller will pay $2500 to the state, rather than $500.

The localities affected by the increase are: the City of Alexandria, Arlington County, City of Falls Church, City of Fairfax, Fairfax County (including the Towns of Clifton, Herndon and Vienna), Loudoun County, City of Manassas, City of Manassas Park, and Prince William County.

So sellers, push for a 2007 closing. And if you're a buyer who is indifferent about when to settle, offer to settle in December and ask for half of that savings back as a closing cost credit - it's win-win!

Thanks to Marcus Simon at MBH for this reminder!

Attention Sellers: 5 Mistakes Listing Agents Make

Sometimes I'm shocked by the lack of attention to detail on the part of listing agents, and unfortunately sellers usually don't even realize it. There are at least 10-15 significant ways that a listing agent can differentiate themselves--and, by extension, the listed property, and they do not all involve spending more money. In fact, sometimes it's the activities that require time, not money, that get a property more attention. I work with a lot of buyers, so I see exactly how buyers react, and as their agent, I know which inconveniences I'm willing to tolerate to still show your home. Believe me, it's not enough just to list the property in the MLS!

Here are a few "quick hits" that sellers can easily check for themselves. If your property is currently listed, see if your listing meets these criteria. Though they may seem obvious and easy, you'd be surprised at how many listings don't do these simple things that encourage easy showing of your home. As your agent (or check for yourself) to see if your property is "buyer-friendly." In a market where there are so many options for buyers to choose from, combined with buyers who are part of the internet's "instant gratification" generation, it may make the difference between getting your house shown and not.

Obviously you want to make sure your property is listed. But ask your agent to send you the listing (or even just search for it yourself on any of the major broker or agent sites, like this one. Here's a sample of what a property will look like in the MLS (this is one of my recently sold listings.) There are 5 simple yet very important things to check:

1. Photos - Does the listing have multiple photographs (either via still shots or a "virtual tour")? On the top left corner of the sample listing, you can see a small camera with a number next to it (the stills) and a movie reel (the virtual tour). I'm partial to the stills because they load more quickly, which is critical for the internet-savvy buyer. There are also some really bad virtual tours out there that focus more on the music and zooming rather than actually showing the property. A lot of photos is an absolute must--buyers assume something is wrong with the property if there is just an outside shot (or even worse, no photo at all!)
2. Directions - You'd be shocked how often directions are incorrect. I often send my buyers on a "drive by" of properties before we go see it together. If the directions are wrong, and they're already out driving and can't easily mapquest it, they will quickly give up on your property. (A corollary to this: if your agent is doing open houses for you, check the ad that runs on the day of the open house.)
3. The description ("Remarks") - What does your agent say about your property? Is the description accurate? Do you think it presents the most positive features? Are there typos or spelling mistakes? What does that say about their attention to detail?
   
4. Showing Instructions - This isn't publicly viewable so you will have to ask your agent to print out their own version of the listing for you. It tells a buyer's agent where and whether to call before showing, and where to find the lockbox. It's important that it not be too difficult to arrange viewings (e.g., "Call two owners and agent prior to showing. Show only M-F 9-5pm.") If I have to make 3 phone calls to coordinate a visit--not to mention coordinating my schedule and my client's--versus the unit across the street from yours that says "Go anytime," which one do you think will be the one we will visit when we just have time for one or two showings? Or if a client calls at the last minute--as they often do--to say "Do you have time today to show me some units in X development?" Also, ask your agent where the lockbox is, and if it's on a fence with 10 other lockboxes, as is often the case of a condo building, make sure it's clearly labeled as belonging to your agent and/or your unit. Better yet, go check out that fence yourself and make sure you can tell which one goes to your unit. If you can't, chances are a buyer and their agent can't either. If you can't find the box and the key, then how can the person that wants to show it to a buyer? It's so frustrating to have planned all week to spend the afternoon with a client, then we can't find your lockbox. I call your agent but get their voicemail. If I can't find the box and key, unfortunately I have no choice but to move on, as there are plenty of other units out there.
5. Online presence - is your home listed on sites other than the MLS? There are dozens of places that agents can list your home for free, if they take the time to do it. Go to Craigs List, Yahoo real estate, GoogleBase, Trulia, and other sites and search for your home. Study after study show that the majority of homebuyers start their search on the internet, so you want to cast as wide a net as possible. If you can't find it, ask your agent why not.

These are just a few of the ways you can make sure that you raise the expectations bar for the quality of services you receive. To hear more about how listings agents can differentiate themselves, please contact me.

Zip Code Comparison Site

A friend sent me this and I think it's a pretty neat resource - there are lots of census data-driven sites out there, I know. This one has all the usual data (education, marital status, income levels, unemployment levels, occupation, demographics, etc.) but this one also has a neat comparison option to compare up to 20 zip codes, and presents some of the data graphically too, which makes it a little more interesting to peruse.

http://zipskinny.com

First Time Buyers in the District - $5000 Rebate Through Year End!

Here's one more reason to buy now, at least in the District: For first time buyers that settle on a purchase in DC before December 31, you may get a $5000 credit (not a deduction--an actual dollar for dollar offset on money owed!) on your Federal Taxes. That's the same as Uncle Sam giving you $5000 of your hard earned money back just as a 'thank you' for buying in the District.

You may recall that the rule had expired in early 2006, but was approved during the final Congressional session of last year, and made retroactive to the delight of many 2006 buyers. It expires again at the end of 2007 (next month.) Even if you own a home somewhere else (including the D.C. suburbs), you can qualify for this tax break if the house you buy is the first one you own in D.C. In fact, you can qualify even if you have owned a home in D.C. before—as long as you have not been an owner for at least one year. There is, however, a phase out based on income limits: between $70,000 and $90,000 on single returns and between $110,000 and $130,000 on joint returns.

$5000 would make a nice Christmas bonus, no?

Q3 Trend Report - What are you waiting for?

The Metropolitan Regional Information System (MRIS, the group that runs the Multiple Listing Service) has released its Q3 Trends in Housing Report. It’s an interesting read. You can view the full 22 page report here.

Some highlights:

- Job Growth: Over the 12 months ending in August 2007, over 47,000 new positions were added-—5.8% above the 15 year average. Interestingly, all of the government job growth came from local governments, not Federal. The local unemployment rate dropped even further, to 3%, the lowest in the nation for any major metro area. Even more jobs are expected to be created in 2008.
- Residential housing market – “remains in an adjustment phase at 3rd quarter 2007, though there are signs of creeping back towards equilibrium….Average metro-wide prices in July and August were more than 4% above prices the same time last year…The average days on market has consistently declined since the beginning of the year.” This next part is critical: “But the gains are uneven, with desirable areas inside the Beltway showing strong price gains and shorter listings, while the reverse is generally happening as distance from Washington increases.”
- Outook: “By spring 2008 we expect that consistent demand (generated by steady job growth, net migration, and a rising immigrant population) and a decline in construction will stabilize pricing, leading to an uptick in sales activity, with improvement in market conditions appearing by summer.”

So what does this mean? A few points:

Not surprisingly, and consistent with other posts I’ve made, the job market is a huge driver of where the real estate market will ultimately head. More jobs = either a) more people moving to the area or b) higher salaries (more employers competing for the same employees), or some combination of both. People with higher salaries are more likely to buy, and people moving to the area need a place to live, whether it’s renting or buying. (More demand for rentals will translate into higher market rents, which will in turn make buying a more attractive option.) Either way, it's going to result in an uptick in housing. So if job growth is good, eventually the real estate market will follow.

Next, the point about uneven gains is clear to anyone who has been tracking specific neighborhoods in the past year. All those foreclosures and short sales you read about? The overwhelming majority of them are in the outlying suburbs – Herndon, Leesburg, Woodbridge, and similar areas.

But what about 1BR condos in 22201 (that includes Ballston & Clarendon)? So far in 2007, the average 1BR condo stayed on the market for 40 days. In January, the average 1BR condo in 22201 sold for $305,644. By August? $363,252. Granted it’s come down a bit since August, to $320,183 in October, but if you’re waiting for 1 BR condos to bottom out in the orange line corridor, you just may have missed it. (Side note - January was the lowest price of any month in that zip code in 2007, and not surprisingly, since fewer buyers means more negotiating leverage. Implication: This is a great time of year to get started with your search!)

My point isn’t that you should try to time the market down to the month, but rather to take a more macro view that the coming months are in fact a good time to buy. If you don't buy in a buyer's market, when should you buy? Never? I doubt you believe that or you wouldn't be reading this post.

This too, like any other buyer’s market, will eventually turn to a seller’s market. The tricky thing about changing markets is that you don't know when it changed until long after the fact. It's not like the Post will suddenly have a headline that reads "Real Estate Market Bottoms Out This Month." Think longer term, and if the circumstances of your life have you thinking you want to buy, pick the one or two neighborhoods that you're interested in and really dig into that data to see whether the micro trend reflects what you've been reading in the papers. Then make the "buy or wait" decision. You may find that what you "save" by waiting isn't a savings at all. (see rent vs buy calculator post here - this one has great options that aren't normally included that allow you to account for condo fees, tax brackets, and rate of return for the alternate use of your funds .) If you're thinking of buying in Woodbridge though, I'll save you the trouble: wait.

Data Source: MRIS. All data deemed reliable but not guaranteed.

Two Buyer's Agents You Should Never Use

One of the projects I'm working on is an article about agents you should never use. No, I'm not naming names, but rather categories of people that you should think twice about hiring if you're buying a home. Two of them were mentioned during a "Chat Plus" column in the Washington Post (read it here.)

The first category of "agent" you shouldn't use--though it's perfectly legal if the right disclosure forms are signed, and no doubt many agents would argue with me on this one--is the listing (or seller's) agent. This is the agent that has been hired by the seller to get the best deal for them. They have a legal and moral responsibility to keep information confidential, and to look out for the seller's best interests. In DC and VA, it's legal for an agent to be a "dual agent", meaning they can represent both sides. I wish someone could tell me how it's possible to have both people's interests at the top of their mind when negotiating a deal. My clients look to me for advice, and in a world of negotiation, it's quite frequently the case that what's best for one side is not what's best for the other. Yes, I've read the "win-win" books, and "getting to yes" strategies, but seriously, in today's real estate market, isn't 90% (or more in many cases) of the deal price? Maybe not for the agents out there, but I have yet to come across a buyer or seller who, if forced to rank what's important, doesn't say "price". And if I'm fairly representing both sides, isn't every dollar I negotiate hurting at least one of my clients?

Now the argument I hear from buyers is "I'll save x% if I don't have an agent." And that's a big myth. The truth is that the commission is negotiated between the seller and the listing agent before the property ever even goes into the MLS. That (full) commission is getting paid even if you don't have buyer representation. The only way around that is if the buyer negotiates with both the seller for the property, and the seller's agent (for the commission). So that agent is taking on more risk (because you're not represented), more work (because chances are you don't know the paperwork that's required and how to interpret it), for less pay. Not impossible, but I know a lot of agents who wouldn't do it. And of course if there's another potential buyer who DOES have representation, isn't it fair to argue to a seller that the buyer in that case is less risky? There's less risk of something falling through the cracks and blowing up at the last minute because there isn't someone guiding that buyer through the process.

The other issue is that the x% is already "priced in" to the list price. The seller knows that, the agents know that, and the buyer knows that. So if a buyer comes in and says "I don't have an agent, so I want x% off," don't you think the seller wants that same x% back?

Of course these are all generalities, and there are exceptions to the rule, etc., etc. My point is simply that it's not as straightforward as saying "I'll just negotiate the x%."

This is a complicated issue, and one that people get passionate about. (Don't they always when money is involved?) There are lots of qualitative reasons buyers should use an agent too, but I'll save those for another post.

By the way...I mentioned that the WP chat discussed two agents you should never use. The second? Yourself, to avoid the very issue discussed in the chat--signing documents you don't understand.

First Time Buyer Assistance Programs

Believe it or not, this is a perfect time to start planning for a home purchase in the spring, especially if you're a first time buyer. The reason I say that is that I find it takes most of my first time buyer clients at least 3 months from the time they first speak to a lender until the time they move in. If someone has special financing restrictions, or isn't quite sure yet what they're looking for in a home or neighborhood, then it takes more in the range of 4-6 moths!

Financing in particular takes some very advance preparation--saving for downpayments and closing costs, sticking to a budget, and fixing any credit issues can take quite a long time. With the cost of housing (still) being what it is in this area, it's especially difficult for first-timers.

If you're thinking of buying in DC, though, there's a special program that may help you out. Like many special programs, there's a bit of paperwork involved, so it's best to get started far in advance. HPAP enables lower and moderate income buyers (that is, making less than $70K per year) to receive up to $70K in funds in the form of a low-interest loan. In addition, buyers can receive up to $7000 in closing costs free! Closing costs average 3% of a transaction, so on a $300K condo, that covers almost all of them! Tough to find a better deal, but there is paperwork and classes involved so get started now if you're thinking of buying in the spring. Get more info here, and contact me to discuss how best to coordinate your search using HPAP and other programs.

There are lots of other programs too; here is a link to some other area programs.

Confused about how to start your search? Attend a free first time home buyer class in Arlington, VA.

Energy Tax Credits for Homeowners

Time's running out for homeowners to take advantage of the Federal Tax Credits for Energy Efficiency. These are a great deal--not simply a tax deduction, but a tax credit that offsets actual dollars owed! Homeowners can benefit from upgrading to energy efficient windows, HVAC units, tankless water heaters, roofs, and more. But updates must be made by the end of 2007, so if you are overdue for some updates (or even if you're not) this is a great time to get going on those projects! For more info , click here.

Parkside Alexandria

Here's an interesting new twist for builders trying to liquidate inventory: the live auction. Parkside Alexandria, a condo community on Van Dorn St, is selling 30 condos with a minimum bid of $225K for a 2BR/1.5BA unit. There certainly aren't too many 2BR units inside the beltway for that price. There are some catches, of course - you must register by 10/23, sign the contract on the spot if you win, bring $5000 with you, and close before Nov 27, among other things. More details are here. Of course there are also the usual risks inherent to new construction. Contact me to discuss more on these.

One quick note of warning -- if you intend to use a real estate agent to advise you and help review the contract(at no additional cost to you), make sure your agent is with you when you register or the builder will not allow you to be represented.

Looking for Alexandria real estate news? Read our new blog here.

"I want to buy a foreclosure."

I'm interested in foreclosures is something I often hear from clients, but few people really understand the process, and specifically what it means to buy a foreclosed property. It's not for the faint of heart. Though you can occasionally find a bargain, there are unique risks involved with buying a foreclosed or bank-owned property. First, let's clarify some definitions.

It's possible that someone can be "upside down" on their mortgage (that is, they owe more on the mortgage than the property is worth) and antsy for a quick sale before it gets worse. In this situation, the seller is said to be "bringing money to the table" because they literally need to write a check to the settlement company even AFTER receiving the proceeds from the buyer. The seller hires an agent (in most cases) and the property is listed in the MLS--the buyer may or may not even be aware that the seller is in this situation. But what if the seller doesn't HAVE funds to bring to the table? Then it becomes a...

Pre-foreclosure or "short sale": The bank is a third party to this transaction because they have negotiated with the seller to take a loss on their loan. The property will likely be listed in the MLS, but there are special addendums and disclosures because the bank has to approve any contracts. In some cases, this delays the process, which can make timing for a settlement and move date tricky. Read more about short sales in my previous blog entry here. If no buyer is found, then the property becomes a...

"Foreclosure" or trustee sale: This is the proverbial auction on the courthouse steps. Properties are advertised in the newspaper, but typically no real estate agents are involved (because there are no commissions paid--can't blame us for staying away from those!) Note that the property may or may not be vacant at this point...a buyer may be forced to evict the previous owner. This isn't typically the auctions you'd think with bidders standing around with placards. The bank is unlikely to take a bid less than what is due on the loan, and if there's no equity in the property, why would someone buy it? So you need a property that's worth more than the loan, and if that was the case then it wouldn't be a foreclosure to begin with! So most auctions quietly pass with no bidders. If you do wish to bid, it's typical for the bank to demand a 10% deposit at the auction, and you have 15 days to close. These properties are typically sold "as is." If it's a condo, the seller (the bank) is not required to provide you with condo or HOA docs, as in other sales. If the "auction" ends with out a winning bidder, the property moves to...

"Bank Owned" or "REO" (Real Estate Owned): The bank usually works with a Realtor to list the home in the MLS and it's advertised just like any other property. They are usually sold "as is" (no home inspections) and special addendums are required. The addendum is sure to include a penalty for any change or delay in closing--anywhere from $65 to $200/day. While the banks are quick to penalize buyers for any delays, they don't usually hold themselves to the same standards--Some banks have very quick turnaround time on offers (days) and some have very bad turnaround time (months). This uncertainty makes settlement and move-in dates are very tricky, if not impossible, to manage. I've seen buyers put in an offer and wait 3 months only to be told that theirs was not the winning offer. This is typically also not an option for anyone with a brokered loan or stated income loan, again, because the timing is so difficult to manage.

I've found that the only REO properties that are priced significantly cheaper than the market are those that are in very poor condition, and maybe not such a bargain at all. There are always exceptions, and yes, a handful of really great deals out there. But to limit yourself to "foreclosures" is cutting off some of the best deals out there! I've actually found that the best "deals" are where sellers have some equity and can actually afford to sell below market, and have the incentive due to a life change (new job, new baby, etc.) to motivate them!

So to recap: Most people who are looking for "foreclosures" are actually looking for "short sales" or "REO/Bank-Owned" properties. Both categories of sales come with unique risks--specifically:

1) timing--if you have a specific timeframe for moving, make sure you have a backup option for living space
2) financing - related to timing
3) property condition--you won't get to ask for repairs, and may not even be allowed to have a home inspection prior to buying

My advice? Look at all the listings, not just "foreclosures"--which we now know really means short-sales and REO, in your price range. You never know where you're actually going to have the most negotiating power!

Yes, the Market is Down 7% AND Up 1%

Hooray - an article from the Post that is SO useful in interpreting the doomsday real estate stats--and also the overly optimistic ones--that we read about. It dives into detail on the methodology of two housing reports released two days apart: one from OFHEO that claims a 1.2% price increase for the year, and another from S&P claiming a 7% drop.

The headlines might as well read: Lies, Damn Lies, and Statistics. The moral of the story being that anyone who understands anything about data can twist it to say just about anything they want (as an ex-consultant, I know this applies to other fields, not just real estate!)

The article is very insightful and points out that neither stat is completely representative. As usual, the truth probably lies somewhere in between. The author hits the nail on the head in the last paragraph:

Don't overreact when you see big drops -- or jumps -- in these indexes. They are measuring different things, and no national index gets down to the nitty-gritty: what's happening to property values in your Zip code, micromarket or neighborhood.

All the more reason to talk to a Realtor when you're thinking about buying or selling--what you read is only part of the story!

Listings & Dedicated Websites

Most people don't realize that agents have basically complete control over how they market--or don't market--their clients' listings. It's important to ask your agent what, exactly, you'll be getting from them. Of course anyone who works with a reputable broker has the usual fluff--listing in Multiple Listing Service, realtor.com, Broker "X" websites. Unfortunately most of the sites they list automatically populate from the MLS. You need a broader exposure on the web, where 80% of buyers begin their search.

I have a host of standard services that I provide to my listings, including

- Multiple photos in the MLS (Agents used to have to pay for these, but now up to 20 photos are FREE...yet, it's embarrassing to the industry how few agents take the time to upload them.) Almost every buyer I work with says that if there are no photos, they skip the listing, assuming that the seller is hiding how bad the house must be.

- A home warranty that transfers to the buyer. Buyers are nervous, and want to know that the home's systems won't fail right after they move in.

- Postcards to the neighborhood and/or area renters announcing the listing.

- A professional photographer. The majority of agents have neither the equipment nor the training that a professional photographer has, and you need your home showcased in the best possible light.

- Professional printing of brochures. A xerox copy isn't going to stand out amongst 20 other brochures the buyer picked up that day.

- Professional staging consultation. I don't try to be a "jack of all trades." I hire professionals to do a professional job.

- And my newest service, dedicated websites. Check out one of my sold listings at www.eastview914.com . These sites provide a showcase for your home beyond the 3 lines of text in the MLS.

If you're thinking about listing your home, contact me for information about some of the OTHER services I provide to my listings, too!

Sub-Prime Mortgages: Crisis Averted?

I've posted here before that there were signs that the sub-prime mortgage mess, while unfortunate for many, was not the crisis that the press makes it out to be. The housing market is just too important to this economy, and while no one is screaming "bailout", there have been consistent signs that the country is not going to sit idly by and let millions of people lose their homes.

Today President Bush announced that new programs were being established to help 80,000 people who have fallen behind on their payments. I'd be willing to bet that if conditions worsen, even more programs will be announced. Sure, they'll blame it on the predatory lenders rather than home buyers that made bad decisions, but at the end of the day, no one wants people out on the street. It's in everyone's best interests--from the owners', to the lenders', to the government's, to keep people in their homes.

FAQ: ARM Loans

A very informative article about shopping for ARM loans (more popular given the recent jump in both jumbo and second trust rates).

The bottom line is to show around for rates, and know which questions to ask.


- Determine the initial interest rate and how long you will get it
- Ask if it’s a negative amortization loan
- Determine what the rate increase will be and how often it ‘resets’
- Determine what the annual and lifetime ‘caps’ are and how quickly you might reach them – this gives you the worst case scenario on your rates. Make sure you understand what the payment is at those rates.
- Know what the index (LIBOR, T-bill, etc) and spread is
- Know whether your loan is a balloon, and what term the balloon is, or based on a 30 year amortization

The author wisely points out to be wary of internet lenders. I’ve seen cases of this myself—even if the rate does turn out to be as low as they claim, keep a careful eye on the fees they charge but are buried somewhere in the Good Faith Estimate (GFE), and often not in the “Lender Fee” section where you’d expect.

Speaking of fees, that’s the only I’d add to this list—always ask what the fees are, and what they’re for. Always ask about things like: administrative fee, underwriting fee, processing fee, application fee, document fee, and warehousing fee. Don’t get me wrong—a lender needs to make money too, but these are the fees you should be comparing, and negotiating. And also understand the origination fee and any discount fees, especially as it relates to the interest rate you’re being charged. Two lenders might both be quoting 7%, but one of them is charging you a “point” (equal to one percent of the loan value and listed as a “discount point” on the GFE) to get it!

As always, you can contact me with any questions, or to look over your GFE with you. I can’t negotiate it for you, but I can tell you which things I’ve seen before and which things I haven’t. I routinely do this with my clients.

And of course, the way to avoid many issues is to work with a reputable lender in the first place!

22 Condo Projects Canceled? Come on, now...get serious.

Let's get serious. Here's another "the sky is falling" example from the press. Today's Post has a good article on some condo projects that have been canceled, and how that situation leaves buyers in the lurch. Sure they get a refund, but no place to live, and no compensation for their efforts. (A good warning on the risks of buying new construction.)

Delta Associates is quoted in the article saying that developers had canceled plans for 22 projects in the 2nd quarter alone! Really...22?! I just don't buy it...unless they're using "plans" pretty loosely. (As an aside, it's not a bad thing that condo projects get cancelled--it keeps inventory reasonable and supports prices.)

I've been hearing about these conversions back to apts for a year or more. And the same developments are always mentioned: the Joule in Arlington, View 14 in DC, the Bellmeade in Leesburg (Leesburg? That’s a VERY different market than Arlington or DC), Four Winds at Oakton, and a few others. Those conversions happened months and months ago. So where are the 22 from THIS QUARTER? Someone please find this list so we can map them out. I'll bet they're further away than this article would leave you to believe. And what counts as a "planned" development? My guess is most of these "plans" are on paper--units were years away from delivery anyway. We'll never see that list in the Post though, because alarmist headlines sell more papers.

Interest Rate Jumps; Unfortunate, but not Catastrophic

I'll be writing on this quite a bit, and I'll start off by saying that, as regular readers know, I do NOT think recent interest rate jumps are the end of the world. I'll get to why in a bit, but first, a recap.

Last week, large mortgage lender American Home Mortgage shut its doors. That made the markets very panicky and led to an increase in rates for two specific loan types: "Jumbo" and 2nd trusts.

"Jumbo" loans are loans above $417,000--the limit for "conventional" loans set by Fannie and Freddie, who buy mortgage loans from originators. Fannie and Freddie exist to create a “secondary market” for mortgages—that is, they buy loans for cash, and then originators use that cash to make more loans to homebuyers. If they didn’t exist, then banks would only be able to loan as much cash as they had on hand, and would have to hold the mortgages until each homebuyer sold or paid it off. (That’s a bit of an over-simplification, but for our purposes it should suffice.) Fannie and Freddie are government “sponsored” (though not technically government-insured), and so the loans they can buy have certain restrictions, i.e., are under $417K. Because there’s an easily available secondary market for this size loans, they typically have a lower interest rate than the larger, or “jumbo” loans.

Now, $417K doesn’t buy you much in this area, so lots of people end up with “jumbo” loans. And since even the smallest place is usually in the $300s, many people in this area don’t put 20% (or about $60K+) down. That hasn’t been an issue until now. You can put 5% down, take out two “trusts” (or loans)—one for 80% and one for 15%, and be on with your home purchase. Those second trusts are becoming an issue, though. Read on:

The second impact of this panic is a big jump on the 2nd trust rates. 2nd trusts have always been riskier for lenders—they’re junior liens, after all, and so carried a higher interest rate. But that rate is the other important change in the past week. It jumped significantly.

Two impacts on this market are clear, but in my opinion, neither is catastrophic. At least not yet.

1) For most buyers, they can afford less. So if you were shopping at the top of your affordability range, chances are you can no longer afford that payment, regardless of how much you were putting as a down-payment. How much less? We’ll have to see where the rates stop. According to the Post, rates are up almost a full percentage point since May. So for every $10,000 borrowed, that’s $100/year.

Let’s use an example. Let’s say a buyer was looking at in the $600,000 range starting in May. Rates jumped up a point since then. That means that if there is NO room in their monthly budget (and why would any responsible person be looking at that price if there was absolutely no room in their budget?!) then now they can only afford $500,000. Another way to say it is that having the same $600,000 mortgage now costs them an extra $6000/year (which, making some assumptions about income bracket, is about $4000/year out of pocket after taxes.)

My guess—and I certainly could be wrong—is that people shopping for $600,000 homes have just a little bit of wiggle room in their budgets, maybe even up to $4,000/year. I think most people in that income and affordability bracket will make the trade-off, see their home as an important investment, and forgo a few discretionary items to get the house that they still want. I believe that the majority of the people are NOT going to change the range in which they’re looking, at least not by much. Again, maybe I'm naive, or maybe I'm just lucky that my clients tend to be responsible purchasers (or, not to pat myself on the back too much, but maybe I do a good job counseling them up front and introducing them to reputable lenders who counsel them too).

In my experience, the people who tend to stretch their budgets to the breaking point are the people who are buying their first place, which is often under $417K, and therefore not impacted by the jumbo rate jump. They are, however impacted in another way. They usually have less of a down-payment (because they’re not rolling over equity from a previous home), and are borrowing more than 80% of the purchase price.

2) For all borrowers planning to finance more than 80% of the purchase, you can afford less. This one worries me less—one, because only 15% of the loan is going to have a significant jump in rate, and that’s a whole lot better than having it hit the 80%. Second, there exists an option to borrow 95% as one trust and pay PMI. PMI, which historically was a dirty word for borrowers, is more acceptable now because in 2007 it’s tax deductible, same as interest. Boy, did they pick a good year to change that rule! So the 95% trust, as long as it’s not jumbo (see impact #1) should keep the payment roughly what a borrower was planning two weeks ago.

I’m sure this will continue to be a front-page crises for a few weeks. I’ll write more as the situation evolves. But I still stand firm in my conviction that if you are:

- Financially able to buy: good credit, a reasonable budget, about 8% of the purchase price in savings, and
- Your life situation calls for buying instead of renting: will be in this area for 3 or more years, you have reasonable expectations of what you get for the money, and you recognize that even a flat return on an investment is better than rapidly increasing rents (see Rent vs Buy calculator post),

Then this is still a good time to seriously consider buying.

Entrepreneurship

This is the first post I've written that's not about real estate. Well, not exactly about real estate anyway. It's really about helping others to help themselves. I recently learned of kiva.org -- a microfinance site that allows you to make very small ($25) loans to people in need across the world. I was intrigued by this site for a number of reasons, but mainly because I just got back from a trip to Vietnam and Cambodia. It was an amazing trip--more of an "education" than a "vacation," really. I won't take up space here with details (though I'll happily discuss off-line with anyone who's interested.) Suffice it to say that there are pockets of extreme poverty, yet in the midst of that, tremendous courage and a pursuit of something better. Entrepreneurship is everywhere. People do what they can to earn a living and provide a better life for their family. People all over the world, deep down, really do want the same things.

I started thinking about my adventures in real estate, and how lucky I am to have been given so many opportunities in my life -- education, careers, mentors, financing. It's so easy to take it for granted. On kiva.org you read profiles of people who are asking for so little, to try to get to the next stage of their lives.

Most people don't know this, but real estate agents are all independent contractors (1099 for all you payroll types.) We front money out of our own pockets for all our start up expenses--advertising, licensing, computers and cell phones, MLS access, business cards, etc. People always ask me who I work for, and the answer is "myself." Though affiliated with a broker, they don't provide health benefits, retirement benefits, equipment, clients, salary or draws, or many other things that people assume are provided. Being in real estate really is being a one-woman show (though in my case, I work with an amazing team!) That's probably why so many people fail. It's starting a business from nothing, with nothing.

When I think about where I am today, I'm so grateful that, truth be told, it was easy enough to get started in this business--some money, some time, some effort. And then I compare it to people trying to build a better life in other countries and I feel so, so lucky.

This isn't nearly as eloquent as I was hoping to be, but I hope you get a sense of where I'm coming from. And thank you to everyone who has ever given me an opportunity: parents, teachers, managers, co-workers, clients, and friends.

See more at www.kiva.org

FAQ: Earnest Money Deposits

I love the Post's Saturday Real Estate Mailbag. There's always something interesting in there. (Though if you read it long enough, you do start to see the same questions over and over.) Here's a good tried-but-true one that I often get from clients -- how much should you put as earnest money? What IS "earnest money," anyway?

Simply put, earnest money is a personal check that you write (payable to your real estate broker or another third party) that accompanies your offer on a property to indicate to the seller that you are sincere, or "earnest," in your endeavor to buy their property. It's a "good faith deposit" on the property. Once you agree to terms, the seller will be removing their property from the market and passing up potential future offers, so it's only fair that they have something more tangible than your signature to rely on. It's a buyer's way of putting "skin in the game."

The check gets cashed upon contract ratification, and the deposit is held by that third party until settlement, at which time it is applied to your downpayment or closing costs. In the event of any overage, it's refunded to you at settlement. In the event of a default by the buyer, the seller theoretically can claim that deposit (though in reality it's extremely difficult to make that happen.) Here's a great FAQ from the mailbag:

DEAR BOB: What is the normal earnest money deposit that should be offered by a buyer for a $350,000 condominium? Is it a percentage of the sales price, or is it based on something else? -- Ottilia C.

DEAR OTTILIA: There is no "normal" earnest money or good-faith deposit for the purchase of a residence. At a minimum, however, it should be 1 percent of the sales price to show serious intent. That would be $3,500 in your situation.

If you are making an offer substantially below the seller's asking price, a larger deposit can impress the seller. However, your deposit should not be more than 5 percent of the purchase price. Always make your check payable to the firm you want to handle the closing of the sale, such as a title-escrow company or perhaps a real estate lawyer -- not the seller.

Of course this column is syndicated nationwide, so may not represent the typical transaction in this area. Though there is no specific requirement, in my experience and in the current buyer's market, you should be prepared to put about $5000 as a deposit for a transaction value up to about $350K, $10,000 up to about $600K, and for anything higher than that $20-25K would likely be considered sufficient. Obviously the more you put down, the more seriously your offer will be considered, particularly in a competitive bid situation (yes, they still happen!)

What Happens at Settlement?

Honestly, very little. Mainly you sign your life away to the bank that gave you the purchase money. But having a good settlement attorney can certainly make your life--and your home purchase--a lot easier. Here's a good article from the Post.

Buyers have the right to choose the transaction's settlement attorney, who represents neither the purchaser nor the seller. (I know, it's a little weird...the attorney represents the transaction itself.) I know in some states it's common for buyers and/or sellers to hire their own attorneys, but I haven't been to one yet in this area where that's been the case.

A good agent should have relationships with one or more reliable settlement attorneys. And yes, there are often "relationships" between the large brokerages and settlement firms, as noted in this article. I wish I knew more about the fee sharing -- I know I don't see a dime of it, and I'd be crazy to risk a good client relationship over something like that anyway. Who wants to work hard for months on a deal only to risk having it blow up at settlement?? I recommend settlement attorneys based on their thoroughness, reliability, and availability to answer questions along the way, (and of course fees.)

You designate your choice of settlement attorney when you write the offer, though, so it pays to be educated on this topic earlier than later in your home-buying process. And, as always, it helps to be working with an agent you trust who can recommend qualified people for your "team."

How Low? It Depends...

Finally, a (mostly) balanced article from the WP: How Low Will It Go? Well, Where Do You Live?

Though the first half of the article (the 'above the fold' part) describes a Manassas homeowner who has lost $200K since buying last year, the article goes on to describe the stark differences between that Manassas market and the closer in areas which are seeing increases.

The Chicago Mercantile Exchange started trading a new instrument that is essentially a futures contract on the residential housing market. That index is predicting a 4% decline in the Washington area. Moody's Economy.com is predicting a 6-7% decline through the end of '08. But neither index makes a distinction by neighborhood, and as anyone who lives here can tell you, there is a world of difference between living in Manassas and living in Arlington.

The article also points to GMU's Center for Regional Analysis, which I've discussed several times in this blog, as well as my first-time home buyer classes, before. They think the national forecasters underestimate the strength of local employment, and they are predicting a 2% increase this year, then 4-5% in 2008. Who's right? Time will tell.

Burglary Prevention

I often get asked questions about crime (which I usually can't answer -- see "What Realty Agents Can't Tell You" entry from April 2007). I did come across this helpful graphic "Anatomy of a Burglary" in today's Washington Post. Pretty interesting stuff. Some good tips on where NOT to keep your valuables. In this season of vacations where homes are left empty for a week or more, it's worth being smart about.

Here are some more tips from Arlington County:

Before you leave...

* Make sure your home looks lived in, not empty: stop mail and cancel all deliveries or ask a friend to make daily collections. Hide empty garbage cans. Leave shades and blinds in normal positions. Put an automatic timer on several lights and the radio. Have a neighbor keep your property maintained.
* Leave a key to a trusted neighbor.
* Store valuables in a safe deposit box.
* Tell a neighbor you trust your departure and return dates. Supply an itinerary with phone numbers where you can be reached in an emergency.
* Ask police to make extra checks at your residence.
* Lock all windows and doors. Double check basement and garage doors before you leave.

On a related note, and relevant to your homeowner's insurance, it's always worth keeping a detailed record of your assets, in case they are stolen. You should include the brand, model, purchase price, and age. Another good idea is to take some quick digital pictures around the house of items that are likely to be stolen in the event of a break-in and email them to yourself for archiving.

Map Your Community

Another cool interactive tool from the WP - a "Map Your Community" tool.

It allows you to enter an address or zip code, and has tabs you can click on to map recent sales, crime, and school info. Good stuff.

"Junk Fees"

The Washington Post had a good, though short, Q&A on "Junk Fees" from mortgage lenders. Many people know BoA has a big promotion running right now for their "no fee mortgage plus" which advertises $0 closing fees and $0 application fees, with no PMI. (Update July 2007: See the article about whether BoA's program really saves you money here.)

But what are these fees? And which ones are negotiable? Here are some excerpts from the WP, and you can read the full entry here.

The first category of charges listed are those items payable in connection with your loan. These may include an origination fee, points, appraisal fee, credit-report fee, mortgage-broker fee, underwriting fee, processing fee, courier fee and wire transfer fee. An origination fee and points are typically a set fee that you have agreed to pay to obtain your loan. It may be a percentage of the loan amount, say 1 percent.

An appraisal fee and a credit-report fee are typically not negotiable, as the lender or your mortgage broker will order these.

The mortgage-broker fee listed on the good-faith-estimate form is negotiable. The lender's inspection, underwriting and processing fees may be somewhat negotiable, but many lenders stay fairly firm on these fees.

Courier and wire-transfer fees are typically charged for transferring loan documents to the escrow closing company and wiring the loan proceeds to the closing officer. You may ask that these be reduced or waived.

Tysons Tunnel

I'm often asked whether buying in Tysons is a good deal, since values may go up with the coming metro line. I wish I had a crystal ball every time I asked what a "good deal" was, but in this case, the one thing I do know is that if you're buying for metro access, you better count on it being a medium- to long-term investment. Today's "Commuter" page in the Post had this update (paraphrased):

The project's first leg will go through Tysons Corner to Reston. Work will begin this summer and the initial phase is scheduled for completion in 2013, with the second phase expected by 2016.

A few things immediately come to mind: there's still quite a big of controversy over whether to build the rail above or below ground. I'm not sure whether those dates in the Post represent the original above ground option, or the much-lobbied for below ground. (See www.tysonstunnel.org for the lobby perspective.) I assume it's the former, and if so, it's reasonable to assume any change to the latter would delay. Even if they move forward above ground, when's the last time you heard of a major construction project finishing on time. NINE years from now?? If that happens, kudos to the planners on that project!

In related long-term construction news, the Springfield Interchange ("Mixing Bowl") project, which started 8 years ago, is scheduled to be completed this summer. I can't imagine all those years of commuting joy, dealing with heavy construction, detours, new traffic pattersn -- congrats, Springfield! Tysons, you may want to ask for some tips on how to survive the next 9 years.

Interest Rates Expected to Continue Rise

Excerpted from May 26 Washington Post: Rates on 30-year mortgages jumped to their highest level in seven months as prospects diminished for Federal Reserve rate cuts any time soon, reflecting concerns in financial markets that inflation worries will keep the Fed from cutting rates in coming months.

Frank Nothaft, Chief Economist at Freddie Mac, said he was looking for a gradual rise in mortgage rates the rest of the year...and looked for housing to stage a recovery beginning at the end of this year, with a modest increase in both sales and home construction in 2008.

**

30 year fixed rates now average 6.37% nationwide. Let's keep this in perspective though. Take a look at the long term average rates:

Source: Long & Foster

Information deemed reliable but not guaranteed.

So, in the big picture, rates are still extraordinarily low. Let's use a real life example: take a $500,000 loan (more than the average condo in Arlington, but we'll use it because it's a nice round number). A borrower with a 30 year fixed rate loan of 6.35% has a Principal & Interest (P&I) payment of $3,111/month. Let's say rates continue to go up--at 6.45% that same loan has a P&I of $3,144, a difference of $33. Of course $33/month adds up over time, but if that $33 is make-or-break in your budget, then you should NOT be buying a house in that price range anyway. If rates go all the way to 7%, then we're talking $215/month, so that gets to be a bit more significant in the monthly budgeting process. I guess what I'm saying is to not panic when you read rates are slowly going up...a small tick in prices should not impact your go/no-go decision in a home purchase, and if it does, then you need to be looking in a lower price range.

Sub Prime Meltdown: The Middle of the End?

Several weeks ago I posted about Fannie Mae and Freddie Mac programs to help borrowers who are in risk of defaulting, or have already defaulted, on their sub-prime loans. By now, everyone has read of the "melt down" fueled by 2/28 and 3/27 adjustable rate loans that offered very low teaser rates back i n 2004-2005, and are due to begin resetting this year. The issue is that lenders approved borrowers based on those low initial payments and now that the payment will be going up--often very dramatically--borrowers who either didn't understand the resets, or just aren't good at budgeting, are in serious trouble.

Now Congress may be stepping in as well, in the form of a "stealth bailout" via the FHA. The Federal Housing Authority has many loan programs aimed at helping first time buyers, but the loans came with some serious drawbacks: heightened inspection requirements, mortgage insurance, and most importantly in this area, a relatively low maximum borrowing cap. With prices so high in this area, FHA loans just weren't a good deal for most borrowers. Congress is currently considering an FHA overhaul package that would, among other things, raise the cap, and lower the down payment requirement, all while providing 30 year fixed rates that are about 3% below the going sub-prime rate. Obviously FHA is expecting to see a surge in applications. Of course there will be snags as this bill makes it through the convoluted process, but if it comes through relatively intact, this could be the "middle" of the end of the "meltdown."

Builder Permit Drop: If this is bad, then what counts as GOOD?

Real estate articles in the Post often drive me batty. Take an article in today's paper with this headline:

"Builders' Permit Requests Tumble; Drop Seen as Bad Sign for Housing"

The article goes on to describe that permits for future construction dropped by the largest amount in 17 years, and that this is yet another indicator that the five-year boom ended last year. Really? Duh. Anyone who has looked around their neighborhoods at the For Sale signs in the last year can see that. What I think they missed in this article is that rather than this being a BAD sign for housing, this is actually a GOOD sign. Maybe even a GREAT one. It means that the builders recognize that the pace of building was unsustainable, and that inventory flooded the market. Permits is obviously a leading indicator of deliveries, so now we can expect a drop in deliveries later this year and into next. How can anyone argue that fewer houses being delivered is a BAD thing in this market? It means the market will be coming back into a more reasonable balance between available inventory and buyers. But, as we all know, bad news sells papers, so any available statistic gets spun as "bad news." I'd be willing to bet that if permits went UP, then the headline would have been something like "Builder Permits Increase; Flood of Inventory Expected to Worsen Housing Market's Woes"

Once again, I have to advise that if you're looking to buy a home (not an investment property--that's a whole other post), then you have to look at your individual situation, talk to a Realtor, and run the numbers yourself. Don't let the press--which is certainly a LAGGING indicator--overly influence your decisions.

A Tale of Two Markets

Here's a little tidbid that you won't see in the headlines: April's Days on Market statistic dropped 20% from March's stat! What exactly does that mean? 'Days on Market' is a measure of how long the "average" house was on the market before it sold. So if we take all of the houses that settled in April, on average each was on the market for 82 days. Why is this significant? Because for the 3 months prior it was over 100 days.



In April 2006 the DOM average was 54. In April 2005? 15. Clearly buyers still have a much more comfortable window in which to make their purchase decision. But they have 3 weeks less this month than they did last month. What's going on? Let's take a look at the distribution of DOM for April in more detail.



What we see here is that half -- HALF!--of listings are selling in under 30 days. Who are these 'lucky' sellers? Sellers who are in a good location, at a competitive price, have a house that shows well, and have wide market exposure. Another 19% who have some but not all of those things going for them sell in the 2nd month. So 3 out of every 4 sold homes sell in under 60 days. Not so bad for sellers! The message? There are plenty of buyers out there for the right properties.

At the other end of the bar graph, we still have those dog properties dragging the average down. Slowly but surely they are dropping--whether because the sellers finally came to their senses and dropped the price, or whether they're just expiring unsold, I can't say.

How do you make sure you're one of those sellers at the left end of the graph? Hire an agent who is realistic about pricing, who helps you make the changes to your home to showcase it in the best possible light, and most importantly one who will spend the time and money necessary to market the property correctly. If you or someone you know is thinking of selling, please contact me to discuss how I can help you get your home sold more quickly.

Data Source: MRIS. All data believed to be accurate but not guaranteed.

Arlington Condos - the "Crash"

I'm often asked about the Arlington condo market, with all the development going on and this being a slower market--when will it "bottom out"?













The data's a little confusing. Take a look at the monthly average sales price graph above. You can't make heads or tails of it, let alone find any trend.

But let's 'smooth out' the data by turning it into a rolling 3 month average.

Now, that's more like it!

Just to clarify what we're looking at, this is a rolling 3 month average sales price for Arlington condos. For example, the April 2007 data point represents the average sales price (excluding any seller subsidy, but let's save that for another post) for the period February 1 - April 30.

Now we can clearly see the trend since mid 2006. But wait a minute...hasn't the press been reporting that condo sales have been dropping like a stone since the peak in June 2005? What's that peak in December 2006? Oh, and for reference, the "peak" condo price in June 2005 was $387,687 (yes, that's about $20,000 less than today's price!)

Despite that uptick late last year, the average price has dropped about $35,000, or just under 10%, since December 2006. But April did indeed tick up a bit...stay tuned.

So what's going on here? A few things, I believe. First, the popular press is not reporting on the right statistics, first of all. Are there fewer sales? YES! But prices for the most part remain high. Why? The flippers have become landlords to ride this out, so supply dropped a bit. People who didn't have to sell decided to wait it out as well and supply dropped a bit more. There are about 20% fewer listings today than a year ago:

And the local economy, as I've mentioned before, draws people to the area, so demand has helped maintain that equilibrium price. So, we have demand stable (at worst) to growing, and supply stable (at best) to shrinking. Is April's uptick in average sales price just the normal spring "bounce"? Or the start of a trend?

Data Source: MRIS. Data deemed reliable but not guaranteed.

It's All About the Timing

The Express article is finally out. Read my thoughts on the spring market, and also the great experience of my client, Ellen Krouss, here.

Sub Prime Meltdown: The Beginning of the End?

Freddie Mac announced it will buy $20B in fixed-rate and hybrid adjustable rate mortgage products to provide alternatives for sub-prime borrowers. Both Freddie and Fannie Mae are also working on developing new loan types to help distressed borrowers keep their home.

I think these announcements will limit the fall out of the subprime "meltdown"...much to the dismay of the buyers circling and waiting for the big spike in foreclosures in the DC metro area. The fact is that banks don't WANT homes...they want viable loans. They're not in the home foreclosure business, and they take big losses too, so the incentive is there for them to do everything they can to keep a buyer in their house, even if it's a less profitable loan than it was several years ago.

Congress is too wary of being saddled with a "bailout" label to make any broad-scale changes, but Fannie and Freddie are already stepping in to manage the situation. I think buyers who are waiting for short sales and foreclosures in DC or close-in suburbs may be waiting much longer than they anticipated.