Michigan Loan Experts

Is now a good time to buy?

For Americans wanting to buy a new home, there are always two time frames to consider:

1. Now
2. Later

It's why prospective home buyers love to ask the question: "Is now a good time to buy?"  If now is not a good time, they reason, certainly later must be.

Strangely, though, "Is now a good time to buy?" is a question that people ask their real estate agent but never their mortgage guy. 

It's probably a good thing, too, because loan officers have seen a lot of changes over the last few months and we're expecting a lot more this year.

But it's okay.  You can ask me now: "Is now a good time to buy?"

                   

And I answer: "Absolutely and unequivocally yes."

Now is a good time to buy -- not because home prices are flat or because sellers are willing to make deals, but because none of us mortgage guys can predict what the mortgage market will look like "later".

"Now" is full of knowns.  "Later" is full of unknowns.

It's not good to try and buy a home "later" only to find that tighter standards mean you can't get financing any longer.

How much is your home really worth?

The number of home valuation Web sites continues to grow. 

For home sellers, these programs can give a false sense of security (or insecurity!) about at what price a home should be listed for sale.

Computer programs can never replace the role of licensed home appraisers and that's because valuing a home is not as simple as providing some inputs (traits) in order to get some output (value). There is a "fuzzy logic" that computer programs just can't produce in the same way that appraisers and real estate agents can.

Even with tax records, recent sales data, and a full description of a property, valuing a home is as much "art" as "science". 

There are "human" considerations that include neighborhood quality and curb appeal that a computer can't measure.  Nor can a program take into account how a kitchen may require $20,000 worth of work to bring it "up-to-date" or inline with neighbors' homes.

Besides, the real value of a home is what somebody is willing to pay for it.  Therefore, you can never truly know what a home is worth until it has sold.

So, while automated valuation tools are a good start to finding a home's value, they're not equipped to finish the job. 

Absorbtion Rate Primer

Absorption Rate is a real estate term for the length of time required to sell all of a given stock in a given area. 

Savvy real estate agents use it to show sellers how quickly homes are selling in a neighborhood.

Absorption Rate calculation is simple:

• Take the number of homes on the market
• Divide it by the number of closed home sales in the last month.

For example, if 100 homes are on the market now and 9  homes closed in the past 30 days, the absorption rate is 100/12, or 8.33 months.

 

In this example what it means is that with just the homes on the market now it will take over 8 months to sell them all.  A very high number indicates a very buyer friendly market.

New Home Sales Up....Don't Bet on It

A recent Commerce Department report showed that new home sales rose 2.8% in July.

Wow!  All the news about bad real estate markets must not be affecting builders too badly if their sales are going up.

Well let's not get too excited.  The Commerce Department report sounds great but like all reports it's only as good as the information it actually collects.  In this case, it only collects the number of new contracts signed.

Whether those buyers who sign the contract actually close is another thing.  Back in November 2006 information indicated that many builders were seeing cancellation rates of up to 40%.  There has been nothing new to show that those cancellation rates have subsided.  So even if people are signing contracts many are not going to closing. 

Why would people cancel a contract?

• Buyers couldn't sell their current home.
• Buyers see builders lower prices on identical buy unsold properties in the same development and decide to back out when the builder wont' match the price cut for them.
• Buyers can no longer get financing to match their financial situation.

So buyers may sign a new home contract, but until it actually closes it really isn't a sale.

"Repair Credits" could kill your sale

The Southeastern Michigan market being what it is, potential buyers usually shun any homes that need repairs and go straight for homes ready to move in.  So many houses are available that the buyers can afford to be extremely choosy on what to buy.

There are times though when a house with warts is still the one buyers want, but rather than just making a simple offer the buyers make an offer contingent on repairs being done.

At this point the concept of a 'repair credit' comes into play.

The seller may agree to the buyer's demands, but making repairs to a roof or anything else usually isn't convenient if the seller still occupies the house. 

A repair credit is a dollar amount written into the contract to be used to cover the costs of the requested repair.   

The repair credits offer a way for the seller to pay for the work without needing to pay before closing; the money is taken directly from the sale proceeds at settlement.

From my experience, most real estate agents, buyers and sellers, if left to write the contract without loan officer input, do it in such a way that the underwriters will red flag the property for additional review and possible denial.  Even if it goes to closing the loan officer will usually have a more difficult time with it, which usually causes more stress to everyone.

Fact: Unless its specifically a renovation, construction or some type of rehab loan - Lenders do not allow concessions for home repairs to be line-item credited on the final settlement statement. 

This is for two reasons:

1. The lender has no way of knowing that the repair will actually be made by the buyer
2. The lender has no way of knowing whether or not the repair is actually needed

A construction or rehab loan will escrow the money and have inspections to ensure the work is both needed and completed before releasing the funds, but without the protection of an escrow held by the lender those two problems raises the red flag we call "Appraisal Fraud". 

Michigan is one of the states with the highest incidents of mortgage fraud.  Appraisal fraud, where the value of the home is grossly inflated to its true value, is typically a part of most fraud.  In terms of financial crimes, mortgage fraud is one of the highest enforcement priorities for the FBI Michigan Field Office with numerous arrests made over the last two years.

So what's a honest home buyer and seller to do..

There are two correct ways to account for funds for a repair:

1. Depending on loan program you can usually be given between 3-6% in seller concessions.  Check with your loan officer to determine the amount allowed and in the contract make no mention of any repairs but just add this clause: "seller agrees to provide buyer with $xxxx amount in seller concessions". (Always consult with an attorney for the exact wording you should use in your specific situation, but this is the general idea of it)
2. Reduce the sales price by the amount agreed upon.  So if the seller wants 150,000 but the home needs 10,000 in work then drop the price to 140,000.

With either of these ways to handle the repair credit the seller gets the money he wants and the buyer avoids any potential problems with unnecessary fraud flags.