Answering buyer questions regarding mortgage financing

A first-time buyer reached out to me with some great questions.  They are looking to buy a house in Berkeley or Oakland within the next year and had already pursued mortgage financing with a “big bank” as well as a local mortgage lender for a loan pre-approval.  With their price point being $700k-$800k and a 20% down payment, they received rates for a 30-year fixed loan that varied from 3.875% from a “big bank” to 4.7% from a local lender.  They also had an option utilizing cash through a source that would take some time to acquire.

They wanted to know my thoughts on, 1) buying a loan vs. buying cash, and 2) working with a local lender versus a “big bank.”  My response to them was:

One of the drivers of our market in the last 4 years has been low inventory, which has created multiple offers.  I track approximately 200+ transactions in the Oakland and Berkeley area annually and, what is important to note, approximately 80% of winning offers are written with the buyers waiving all of their contingencies (online tools do not reveal type of financing or terms of the winning offers).  If the property is popular, it can be a battleground situation.  One of the implications to this type of offer is that your initial down payment (typically 3% of the offer price) is at risk if you do not close escrow for any reason.

As far as big bank versus local lender, in the 12 years of selling hundreds of homes the majority of my transactions are with local mortgage brokers doing the financing (with a handful of exceptions), but never with the big bank financial institution that this particular buyer solicited Typically in this multiple offer market, a seller will go with the known quantity, meaning the local Realtor and local mortgage lender whose reputations for closing deals precede them.

An example being, this year my client purchased a 2 bedroom, 2 bathroom penthouse in the Adams Point neighborhood of Oakland. On this property there were 12 offers received and there was a full day of negotiating.  There were 4 offers that received a multiple counter offer from the seller.  In the end my client had to increase her price to win the deal, but I found out afterwards that there was another offer identical to ours.  The listing agent mentioned to me that the sellers picked my client’s offer because she conveyed to her seller that I was a local agent with a vast amount of experience in our market and the lender was a local Oakland mortgage provider.  The terms and price were the same.  In no way do I want my clients paying a higher interest rate by selecting a local lender over a big financial institution but we are in a market that is currently beyond competitive.

In regards to cash versus loan, cash can beat out other offers as long as it is about the same offer price as the loan offers.  Meaning if there is a choice of a strong offer with a loan that is more money than a cash offer, I have seen sellers take the loan offer to yield more money.  Cash is king only to a certain point.  I see cash deals about 25% of the time; however, what is even more important is the reputation of your agent and lender.

I hope this potential buyer Q&A helps you as you decide your mortgage financing.

To Buy or Not to Buy

Yesterday I received an email from a buyer who expressed that they were discouraged by the market and were considering taking a year-long break from the house hunt.  They thought the time off would be good to reassess things and watch what happens in the next year with the housing market.  I completely understand their feelings.  In my experience, one of the biggest causes of frustration for buyers is the list price to sold price ratios.  When you see that a home sold for 30% to 40% over the asking price it is sure to be a huge wet blanket.  Often times in those vast scenarios, the house was dreadfully underpriced.  It would be less discouraging if you saw something priced at $1.250 million and then see it close at $1.4 million as opposed to (this real life example of a recent sale in Montclair) a list price of $928K and selling over $1.4 million.

In regards to my buyer taking a break for a year, I support whatever decision is best for my clients.  I am a big believer in buying smart and only when a house really fits your needs.  My best advice would be to line up your financing and be open to what the market may bring, but not feel pressed to buy for the sake of buying.  Next year may bring us a different market and we will not know until we are actively in it.  Perhaps set a pause button but stay open to the possibilities that may come.

Waiving an Appraisal Contingency

If you are active in the Oakland, Berkeley real estate market then you are aware we are in a seller's market and you have likely heard about all of the non-contingent offers. In a seller’s market there are typically multiple bids on a property.  When a buyer writes a competitive offer in an attempt to win the bidding war there are three main contingencies to consider; the inspection contingency, loan contingency, and appraisal contingency.  These contingencies are in place to protect the buyer, however, a buyer can choose to waive any or all in an effort to strengthen their offer and make it more appealing to the seller. I write many non-contingent offers for clients but I only do this when my clients have a thorough understanding of the risks and implications involved with writing and submitting a non-contingent offer. 

When writing an offer with no contingencies, you are telling the seller that should you cancel, for any reason, you are aware that you are at risk of losing your earnest/initial deposit money.

Because the appraisal is an aspect of the escrow that is determined by a third party, I'd like to further address the appraisal contingency in more detail. Every house purchased with a loan has an appraisal performed.  The hope is that the property appraises at the offer price.  Sometimes, in a seller’s market, bidding wars can cause appraisals to come in lower than the purchase price.  When an appraisal contingency is in place, an appraisal that comes in lower than the contracted purchase price allows the buyer the opportunity to potentially renegotiate the offer price with the seller. In contrast, if a buyer decides to waive the appraisal contingency, they have to be prepared to increase their down payment to cover the difference in the appraised value and their offer price.  

Real World Example: 

You are offering $900,000 on a home and it is your goal to buy a home with a 20% down-payment ($180,000 cash/$720,000 loan).  

The appraiser comes out and appraises the home at $880,000. You have waived your appraisal contingency, so you will need to have funds to cover the 20% down-payment, of the appraisal price ($176,000) plus an additional $20,000. See below:

$176,000 adjusted down-payment based upon 20% of the appraisal value +

$20,000 additional down-payment +

$704,000 adjusted loan amount = $900,000

Why do the numbers change?  A 20% down-payment loan program is based upon the appraised value, not the offer price. The seller accepted your offer at $900,000 and you wrote your offer saying you would pay $900,000, even if it does not appraise at this price.

What is at stake if you take a risk and do not have the funds to cover the difference?  Your earnest money, also known as a good faith deposit.  Typically, in our niche market, buyers are placing 3% of their offer price in a neutral escrow account. This money is held there until the escrow officer has mutual instructions from both the buyer's agent and seller's agent. This 3% is applied to the buyer's down-payment, unless the buyer breaches their contract. "Breach" means backing out for a reason outside of your contingencies or reasons not permissible per the contract. So, if you write an offer with no contingencies, which many buyers are now doing, and you back out because an appraiser values your potential future home for less than you offer, this is considered a breach of contract.

I hope this explanation helps you better understand the risks and implications of offers written without contingencies - specifically, an appraisal contingency.

Welcoming the Fall Season with Gratitude

After a busy first half of the year, August greeted me with a slightly more relaxed schedule, which was a blessing because I am gearing up for what I think will be a robust September.  Currently I have several buyers looking for homes and several homes getting prepped to hit the market.  As I review my business it feels good because it is balanced; there are qualified buyers in search of their next abode and lovely homes getting the final touches to impress their next stewards.  When I reflect on my book of business it is so much more than closed deals, it is about the people.  Every transaction has a personal story, a life change, a new adventure, and a new beginning.  I am so grateful that you share a piece of your life with me!

Last night I was invited over to my clients Lindsay, Kelly and Collins’s home for wine and cheese.  It has been less than two months since they closed escrow and they have already put their mark on their new space.  One of my recommended arborists came and sculpted the trees that were long overdue for pruning, the wood paneled walls (not the good kind) were removed and replaced with crisp Dove White paint, the light fixtures that were replaced with Rejuvenation lighting (I am able to pass along my trade discount for my clients!), the living room furniture was ordered and delivered, a once-dated fireplace was updated with a wall of white brick, the older Formica and wood bar was transformed with crisp subway tiles installed in a herringbone design, and the bar sink was capped with Carrera marble!  After a tour of their home I was handed a chilled glass of rosé and a cheese platter was served.  It was so nice to relax and learn more about my clients.  After what felt like a brief visit, but was actually 4 hours, I drove home and was filled with gratitude to have people come into my life and stay.

 Why do I share my personal tidbits with you?  Because you share your hopes, dreams and fears with me.  This fall season’s big news is my beloved assistant Kelly is getting married!  I am very excited for her as she marries the love of her life.  My youngest, my son Miles, just started his senior year of high school.  He is a team captain on his football team so on game days I will be screaming for the Saint Mary's Panthers!

My son is #17 Photo credit: James Jackson

My son is #17 Photo credit: James Jackson

This month marks my 12th year in business and I want to thank you, my husband, daughter, son, Kelly and the entire Red Oak staff for the ride!

Happy fall season! 

Will My Home Appreciate?

Many people ask me, "Is this a bubble...when will it burst?"  So I thought, let's track appreciation versus depreciation in the Oakland and Berkeley real estate market.  I tracked sales posted on the local multiple listing service (MLS) back to 1998 and it turns out that we only had 2 years of depreciation, 2008 and 2009.  Funny, I remember that the Federal government gave an $8,000 first-time-buyer tax incentive in 2009/2010 that really boosted sales; and we have not looked back.  

We cannot predict how future markets will pan out appreciation-wise, but it is good to know that going back 18 years there has been only 2 years of depreciation.  This is good data to use in your decision on if or when you should buy.

How Long Will This Market Last?

Anything is possible in regards to our marketplace, however, this is the 4th year of double digit increases and I am wondering how long these property values can be supported.  Currently only 22% of Alameda County residents can afford to buy a home.  This is an election year and if you wait until the end the year to sell your home things could change in the real estate market depending upon how the election goes.  In my experience, property values are driven by a combination of supply and demand, interest rates, jobs, consumer confidence, rent prices and crime rates.  If you decide to sell it should only be if you are really done with your home.

Real estate market report from KTVU news

Real estate market report from KTVU news

In regards to buying a home, economists do think there will be a market correction in the next couple of years.  I am recommending that all of my buyers buy for the long term.  Think of your equity as ghost equity, meaning it doesn't matter what your home is worth until you are ready to move on and sell.  When the market does correct, I do not think people will walk away from their loans like they did before, because many people are buying with heavy cash these days and have a considerable amount of capital in their homes.  

I recommend now (as I have for the past 11 plus years), buy something that fits your needs for 7-10 years or more.