A Shifting Real Estate Market

Scott Schang: Lecturer, DGI Social Media Advisor; Partner at Buy Wise Mortgage, Huntington Beach, MLO Student

Last year, in 2018, interest rates rose close .75% or more across the board between August 23rd and November 5th.  It was an incredibly volatile and market changing 100 or so days.

Since November 5th, 2018, 30 year mortgage interest rates have snapped back, bringing them way back from the early November depths of year high interest rates.

As of today’s writing, rates are actually slightly lower than they were in August 2018, before they started going up.

I pulled topic out of the vaults after a conversation with a very close, and very smart loan officer friend of mine.  I first wrote about using seller concessions in a rising rate market in October, 2018, after about 30 straight days of interest rates rising.

The result of interest rates rising and falling close to 1% over a 5 month period is a nightmare if you are pre-approved, and trying to make offers on homes.  You’re losing money in a purchase money market almost every day it seems like.

As a home buyer, your affordability is getting squeezed every single day, and then you see supply and demand catch up to the changes in the market, and you start to see price reductions everywhere you look.  Especially as properties approach the 30 to 40 day mark.

Seller Buy Down Strategy

As a buyer, you could always go in and make an offer at this newly reduced sales price, take the $40,000 price drop and run, or……we could get creative.

Follow me here:

  • You/Buyer makes your offer at $555,000, the Reduced Price
  • You/Buyer put up a 10% Down Payment
  • Competitive rate on a High Balance Conventional loan is 4.625% 30 Yr Fx
  • Your Principal and Interest Payment would be $2,710 mo (this payment does not include insurance, taxes, PMI, and HOA if required)

Now here’s where it gets interesting.  This recent price drop started from an already reduced price of $585,000.  Stay with me here, we’re going to come in at the original listing price 59 days ago, and we’re going to use $595,000 as our starting point.

  • You/Buyer makes your offer at original listing price of $595,000
  • Ask the seller for $15,375 in discount points
  • This will allow you to PERMANENTLY buy down your interest rate to on a 4.00% 30 Yr Fx
  • Your principal and interest payment would be $2,698 mo, which is actually $12 LESS than if you bought the home at $40,000 less.

Keep in mind that by raising the interest purchase price, you are increasing some of your closing costs, and your down payment.  A higher purchase price will also impact your property taxes at approximately 1% + or – depending on what County you buy in.

Here’s where it really gets cool.  If you have the money to absorb the several thousands of dollars more in down payment that are needed, the interest savings over the next 5 years is ridiculous.

When you do your own comparison, be sure to compare the two scenarios (lower price / higher rate vs higher price / lower rate) on your amortization table over 60, 120 and 180 months.

This is a unique situation because we are already betting that this beauty is a victim of the confusion of the market, intersected by the motivation of a home seller.

The moral of this story?  You win.

How 2019 Home Seller Wins

Not many home sellers launch these types of search queries on Google or Bing.  So I’m not going to spend too much time talking about the home seller benefits.

My plan is to just touch on the greatest wins for the seller using this exact same strategy.  Ok, are you ready?

Consider the above scenario.  Now, let’s looks at what’s in it for the home seller if all they do is say “Yes”.

Consider what the seller is going through.  A real estate agent priced your home at potentially $50k below potential value.  Then took $10,000, and then with 60 days of you agreeing to work with then, they take another $30,000 right off your bottom line by being quick on the trigger to reduce the sales price.

The seller is coming in and offering you your original asking price of $595,000, and only asking that you contribute $15,375 to buy down the interest rate?  Heck yeah, where do I sign up, right?

What Real Estate Agents Need to Know

As a real estate agent in a shifting market, you’ve got to be aware of strategies like this that will preserve home values in your communities.

As soon as you start blowing out sales prices without putting an effort into actually marketing the property properly, it hurts everyone in the in the neighborhood.

As soon as home buyers see home prices coming down, they are going to start waiting it out.

That means that inventory stacks up, and buyers are more patient and cautious with their offers because of rising rate fears.  This is why you get low ball offers.

Using a seller concessions strategy to counter low ball offers is a great way for you to turn a potentially compromised situation for your client into a win/win for everyone involved.

You come out looking like a hero and improve your chances of being thought of first, when anyone mentions buying or selling a home.

Going that extra step, and understanding, or more importantly, partnering with lenders that understand advanced financing strategies like this is what’s going to give you a competitive advantage among other real estate professionals, and leave behind a trail of happy homeowners.

If you represent the seller, you’re making their offer stand out like a light house among the other offers.  It’s well thought out, it’s generous, and everyone wins by entering this negotiation.

If you represent the buyer, you have the ability to help your client the value of leverage, and the return on the small investment to pay the property taxes and down payment on a higher purchase price.

You’re literally comparing thousands of dollars of potential investments, to thousands of times that returned in saved interest over time.

You’ve also preserved home prices in your market.  Great job!

Working with Professionals

I cannot emphasize enough the importance of hiring a professional, experienced Realtor and loan officer when selling or buying your home.

A homeowner that hires an inexperienced Realtor is not likely to even know that this opportunity exists.  Missing this opportunity could cost you tens of thousands of dollars depending on the price of your home.

A Realtor that is simply listing the home for what you “think” it’s worth, resulting in a series of price reductions before it’s priced properly for the current temperature of your local market will cost you time and money.

Many Realtors representing you as a buyer do not necessarily have enough financing experience to negotiate this strategy with the Realtor representing the seller.  And we don’t really expect them to.  They sell real estate, not loans.

However, a Realtor that builds a team of experienced people around them, like home inspectors, contractors, and lenders, will have the resources at their disposal to truly represent your highest and best interest when buying, or selling your next home.

Don’t Limit Your Options! READ THIS FIRST!

Your options are limited to the experience of the person you are talking to on the phone.

When you call a lender from a TV or radio commercial, or click an ad you saw on the internet that has a catchy headline, you are playing competence roulette, and the chances are better than not that you are being routed to a call center somewhere in Michigan (or even overseas!).

These tele-mortgagers hire customer service people to get you excited about borrowing money.

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