Is cash still King?

Many years ago when the market was terrible, a cash buyer had the upper hand when buying a house.  Lending was tightening up.  Appraisals were coming in for less than the purchase price.  Having a cash buyer made a seller feel like it was a sure thing.

Today having cash is not as impressive to most sellers.  Lenders are happy to loan money.  Few deals fall apart due to financing.  If cash makes a deal 100% solid, a preapproval letter make it 99% solid to most sellers.

Also, having cash is fairly common.  25% of my 2018 sales were for cash.  I am not making that up or rounding up or down.  I was hoping the percentage would come in at a more random sounding number, but 10 of my 40 sales last year were paid for with cash.  All were owner-occupant buyers.  None were investors.

I had a buyer write a cash offer last week on an awesome house.  There were 14 offers.  My buyer’s offer and 3 other offers were cash.

In 2019, when does having cash really matter?  If the house is such a fixer upper that it may not qualify for traditional financing, having cash is still King.  If the seller wants a fast closing, cash is still King because a loan will usually take 3-4 weeks.  A cash sale can close within days.  If a seller is worried about the appraisal, then cash is still King because there is no appraisal unless the buyer just wants one.  Short of these 3 situations, having cash doesn’t really tip the scales in your favor like it used to.

Did you get a good deal?

You bought the only house in the neighborhood that doesn’t back to green space?  Did you get a good deal?

You bought the only house in the neighborhood that doesn’t look like the others?  Did you get a good deal?

You bought the smallest home, the largest home, the one with the strange floor plan, the only 3 bedroom home in a neighborhood full of 4 bedroom homes, the one with a one car garage when every other house has a two car garage, the one with the really steep driveway, the only one that doesn’t have a flat backyard.

Did you get a good deal because you paid less than what the other houses in the neighborhood are worth?

Odds are you didn’t.

One of the toughest things to explain to buyers is the difference between actually getting a good deal and the perception of getting a good deal.  Often the odd ball house will appraise for more than it is worth because appraised value is different than market value.  Market value is what YOU or any buyer will pay for it.  Appraised value is what somebody who isn’t going to buy it thinks it is worth based on a formula of assigned values.

It is easy to think you got a good deal because your sale price was lower than the rest of the neighborhood, but value is so much more than price per square foot.  You often don’t discover you did not get a good deal until many years later when you want to sell.  It is only then when you can judge if you really bought it right.

When I buy a house, or am evaluating one for a client, I first determine what is the norm for the neighborhood.  You want a house to fit in.  You don’t want anything drastically different unless it is something like having more bathrooms than the norm, more garage space than the norm, a bigger or better lot than the norm.  Those are good differences because they are better than the norm.

While I am on this subject, I’ll add that having one big positive does not make up for one big negative.  If you have the biggest, nicest lot in the neighborhood but also have the steepest driveway, most buyer’s walk away thinking “If only the house didn’t have that steep driveway, it would be perfect!”

So when you are out house hunting, look around.  Learn the neighborhood.  Find out what the typical house is like.  Then compare it to the one you are interested in buying.   Or, make it easy on yourself and call somebody who knows that stuff already.

Mistakes first time buyers make

Being a first time buyer is tough.  I mean, you go into it with no experience and have to make one of the biggest decisions you’ve ever made!

When my wife and I were ready to buy our first house, we were clueless.  We had a tight budget like most first time buyers.  We would look at terrible houses.  One backed to a train track.  One was in a high crime area.  We finally found one in Winchester.  We had not thought about what happens once we find one we want.  We had no idea what to do with making an offer, the inspection process, or anything else.

We ended up with a pretty worn out house that the seller had only completed 80% of any renovations he had done.  The house did not have central air conditioning, the heat was a fireplace and a giant floor furnace in the dining room.  Usually those giant floor furnaces are in a central location so the heat can move around the house.  Our’s was in the far front corner.  It would get about 110 degrees in that room.  The next room was 90.  The next room was a very nice 70.  By the time you  got to the opposite rear room, it was 50 degrees unless you started a fire in that room.  Also, two of the floor joists were cut when this furnace was added to the house.  It was a really old house and probably didn’t have heat when it was built in about 1915.

We picked sort of a terrible location.  Turns out there was a shooting two doors down right after we signed a contract.  The seller assured me that the shooter only shoots at people he knows.  For some reason, that made me feel better and I made a mental note to never introduce myself to him to avoid being on the list of somebody he might shoot.

We moved in and we were happy living in our craptastic first home.

The house seemed huge at first.  Then we had two boys.  We began thinking about things like school districts and the boys playing outside alone.

We moved.

So, here are some common things that first time home buyers don’t think about……including one first time buyer who would become “THE LEXpert.”

  • Size-Most first timers are coming out of an apartment.  All houses seem big.  I see a lot of people buy a house barely bigger than their apartment.  It becomes too small once a kid comes along.  Try to buy something you can grow into a bit.
  • Location-Most first timers have to choose between a prettier house in a worse location and an ugly house in a better location.  They usually choose the prettier one.  Location never goes out of style, but trust me, one day we will be sick of having everything white and of shiplap.  When that day comes, you’ve got an outdated house in a bad location.
  • Condition-Most first times don’t know how long a furnace lasts, so when they hear that one is 27 years old, they don’t care.  They also don’t know the cost to replace one.  Same for roofs, windows, etc.  I usually tell all buyers that there are 3 biggies in a house, which are the roof, hvac units and windows.  I don’t usually see all 3 that have recently been replaced, but shooting for 2 of the 3 is good.  You don’t want a house that will have a $5000 expense coming up soon.
  • Price-First timers seem to fall into two categories:  The ones willing to pay the full asking price and the ones who will want to make an 80% of the list price offer.  I always tell all my buyers that the first thing we need to do is figure out what the house is worth.    Then we base an offer on the value of the house and not the asking price.
  • Maintenance-Houses are money pits.  Mother Nature is pretty much trying to ruin your house.  She will win the war, but you can win each battle.  You’ll have repairs for appliances, the furnace/air conditioner, your roof may spring a leak, the water heater may go out.  I’ve got a bunch of rental properties.  I usually spend an average of $2k a year for repairs and maintenance.

My goal with all my buyers, especially first timers, is to find a house in a safe location, that won’t need a ton of repairs in the near future, and that will be easy to sell when they want to move up.

LEXpert’s letter to first time buyers

I’ve had a lot of first time buyer’s lately.  They are always so much fun to work with.  Most of them are coming from an apartment, so they get really excited over things like having a garage, or being able to let their dog out in a fenced backyard rather than having to take it on a walk.

I always try to tell them what we are doing before we do it, and explain things as they happen.

One of my new clients mentioned he was thinking about taking a class for first time buyers.  Then I realized I should probably do a quick explanation of the entire process up front, and then go into details as we reach each stage.

So, below is an email I sent him:

We will go out and view any houses that interest you. I’ll offer my thoughts on the good and bad points of each house. I will probably sound very critical of the houses. That is because I want you to know everything I have learned from my experience so that you will be able to make the wisest choice possible.Once you find one you like enough to make an offer on, I will see what has sold in the area and determine what the house is worth. We will want to know this so we can base an offer on the value of the house rather than the list price. The average “List to sale ratio” for this area is about 98% of the list price. If we find a really good house and it is priced right, it could very well go for the full asking price. I am hoping we will see fewer multiple offers in 2019 than we did last year.

To make an offer, you sign a contract and all the supporting documents. We can do that online using an electronic signature program all realtors use.

Often the buyer and seller counter back and forth at least one. The seller may want a little more money, or ask for a different closing date than we put on the offer. Once we all come to an agreement and everybody signs it, the offer becomes a contract.

Once we have a contract, I will get what is called earnest money, or good faith money. It will likely be $1000 but I can try for $500 if possible. This money gets deposited in my escrow account. It is your money. I am only holding it. The only way the seller can get this money is if you default on the terms of the contract. Think of it like a security deposit on an apartment. Should you not be able to get your loan, you would get this money back. I’ll go into the inspection later, but should we not be able to reach an agreement with the seller on a repair list, you would get your money back as long as we submitted the list within the allotted time frame.

You will have a specified time frame to do a home inspection. I usually write 15 days from the time of the last signature on the contract. I have a couple of good inspectors I can recommend, but you are free to use anybody. A good home inspector will probably charge $350-425. You pay them the day of the inspection. At the end of the inspection, we both meet the inspector to review their findings and so you can ask any questions.

A typical house will have 15-20 minor to medium sized issues after a home inspection. An older house will have more. The best house I have ever had inspected only had 3 problems. Keep in mind that the inspector is comparing your house to a perfect house.

From there, we write a repair list. The list is for things that were not disclosed to you. We can’t technically ask for anything cosmetic, or something that was not code when the house was built. A common example of this is GFCI outlets. Those are the ones in bathrooms and kitchens that have the test/reset button. They are usually absent in an older house because the house was built before they became required by code.

Assuming we reach an agreement, we move forward with the sale. The seller does the repairs. We have a chance at what is called a “Final Walk Thru” to see receipts and the work they did. Sometimes we can’t access where a repair was made, so having a receipt or statement is good.

At some point, the appraiser will come out to make sure the value of the house is okay. We don’t need to be there for that.

You have the option to do a termite inspection. I think it is always a good idea. Those are usually about $45. I have somebody I use, but you are free to use anybody you want. We don’t have to attend that inspection. They only take about 20 minutes. You typically pay for this at the closing. The way our contracts are written, the seller has to pay for a termite treatment if any are found. If there is any damage from termites, the seller has to pay up to 1% of the sale price automatically. If there is more damage than that, we would negotiate. If we cannot reach an agreement, either party could walk away from the sale. You would get your earnest money back. Houses often have termites. I occasionally see a little termite damage. I have never had a deal fall apart due to termite damage.

While all this is happening, your lender is asking you for all sorts of documents. Much of what they want will seem silly. I once had a lender ask about a $1000 check I received many years prior to that. It is just part of the process. Also, be sure to get them anything they need as quickly as possible because we can’t close until your loan is done.

The typical time period from contract acceptance to closing is 30-45 days. We will write a target closing date on the offer. Most of the time you do end up closing on that exact date. I’ll probably make it a Friday so that way you will have the weekend to move in.

Most of the time you get to move into the house right after the closing. We call that “Possession with deed.” Sometimes a seller will ask if they can stay in the house for a few days after the closing. I never like that, but sometimes if there are multiple offers, it is done to prevent you from losing the house.

I hope this helps. I love working with first time buyers. I’m here for you, so don’t hesitate to call/text/email with anything you need.

 

The real reason why sales are down

I’m seeing a lot of news articles with accurate data.  My issue is that I think most are drawing the wrong conclusions.

Most seem to want to make you think the sky is falling in real estate because sales are down.

You know who needs to care about the number of sales?  Appraisers, realtors, mortgage people.  Those of us who make money on each transaction.

As a buyer and/or seller, the number of sales isn’t really important to you.  What you care about is supply and demand-the ratio of buyers to sellers in the market.  If there are 3 buyers in the market and only 2 listings, then we have a seller’s market.

I am seeing a lot of articles stating that sales were down in November of 2018 versus November of 2017.  Of course they were.  It happens every election year.  The market pauses until we see which set of morons we will be stuck with.

The ones that really bug me are the ones that say the affordability crisis will hold the market back.  I think they have it backwards.

Sure, we have an affordability issue.  Many people can’t afford to buy a house with rising prices and interest rates.  All I know is that every house under $200k in this town seems to go very quickly, which allows that seller to buy up to their next house and that seller to buy up to their next house and so on.

Back when the market was terrible, I said that it was like a baseball game where the bases are loaded.  The seller on first base needed a buyer without a contingency to buy their house so they could buy the 2nd base seller’s house, who could buy the 3rd base seller’s house.  The first time buyer needed to hit a home run and push all those sales through.

Back then a buyer had a ton of choices for their next home.  The issue was selling their old one.

Today, no buyer really has a huge selection of houses.

For that reason, I think our current market is the opposite.  There are a ton of first time buyers eager to hit a home run and push all those deals through, but what is happening is that the person on 3rd base doesn’t like home plate and has decided to just stand there until they feel like running.

The buyers with the most selection are the people buying their pinnacle home.  The one they stay in forever until they begin to downsize.  These are mostly Gen Xers.  They are in their 3rd base home, which is probably a fairly large home in the $250-350k range.  They want to move up to the $400-600k range, where there are plenty of houses for sale.

Their only problem is that most are just tarted up versions of their current house.  These buyers aren’t getting a better house, a bigger house, or a bigger yard.  They are just getting prettier finishes.  They find the houses in this price range, well, boring.  And we have a TON of them for sale.

So what do these Gen X buyers do?  They wait for the right house to hit the market.  Since they already have a nice house, they are in no hurry.  Because they aren’t in a hurry, that means the people looking to buy their house are in the same position….all the way down to that first time buyer eager to bid their heart out on their first home.

And, that is where we are today.  Sellers wanting to sell but not finding anything they want to buy.