Finally, a Window of Opportunity
Despite Wall Street’s prediction of falling home prices amidst a sputtering economy, the continued lack of inventory in our area has far outweighed the impact of any decline in demand. In fact, multiple offers continue to dominate the landscape for those properties in excellent condition and location. Yet, if you are in the market to buy a home and have an open mind and some degree of flexibility, there are some intriguing opportunities worth considering.
To give you an idea of the current market, I looked at the real-time status of active listings in Piedmont, which can provide a peek into what is also happening in comparable neighborhoods in the East Bay. At the date of this letter, there were 19 homes available for sale of which 6 homes (32%) had experienced a price reduction… clearly a mismatch between the seller’s expectations and the level of buyer’s interest. Put differently, nearly one third of the homes in Piedmont currently available for sale offer an opportunity for a buyer to negotiate price and terms.
So, here’s where the “open mind” comes into play. Rising rates have sent the cost of a new mortgage way up. Additionally many insurance companies have stopped writing new homeowner’s policies in our area, driving the premiums for new policies through the roof. What you may not be aware of is that these factors are causing several creative solutions to emerge that may mitigate the financial impact to you in situations where you have wiggle room for negotiation. Let’s look at a few.
To help soften the impact of higher interest rates on your mortgage, a variety of lenders have programs where the first few years of the loan are offered at artificially low rates in exchange for an upfront fee. The most popular is the ” 2-1” where the first year, the buyer’s interest rate is reduced by 2 points and the second year, by one point. This fee, under the right circumstances, could be borne by a motivated home seller to incentivize a buyer to move forward with an offer. The premise is that interest rates will eventually go down, allowing the buyer a window to refinance their loan a few years down the road. The cost of a “buy-down” to a seller is far less than taking a price reduction on a slow-moving property. I recommend speaking with your lender to learn more about this and see if it could work for you.
Seller Paid Incentives
In situations where a home or condo is subject to homeowner’s association dues, I am starting to see seller’s offer “prepaid dues”, often that cover the first year. Once again, the notion is that the incentive will cushion the impact of temporarily higher mortgage rates. Although I haven’t seen it yet, I could certainly imagine a case where a seller might be asked to cover some portion of the incremental homeowner’s insurance premium for the first year. Any form of seller paid incentive, to be effective, must be fixed and quantifiable, creating certainty on both sides of the transaction.
Carry Back Mortgages
When interest rates are high or credit guidelines are tightened, buyers may get a conventional loan on a portion of the purchase price and ask sellers to finance the balance. Some sellers are more open to this option if they are having a difficult time finding a buyer at their price. It can be a win-win, with a buyer finding the financing needed while the seller closes escrow with the ability to earn a potentially better rate of return than having unused funds sitting in the bank.
Seller Paid Closing Costs
Every regional market has a common practice about which party pays for certain closing costs (i.e. city transfer taxes and title insurance). In a market where a seller is in a weaker negotiating position, a buyer might ask for certain closing costs, normally paid by them, to be borne by the seller. Requiring less cash to close the transaction can often soften the impact of higher short-term carrying costs.
How You Can Be Ready
If you are in the market for a home, this is a wonderful time to be strategic about your process… flexibility is a negotiating strength. First, have your financing package in place (pre-approved) so that sellers know you can close a deal. Second, work with your agent to seek out those properties that did not receive offers on a specified offer date and/or have had recent price reductions. Third, be open to those homes where there is some deferred maintenance or dated finishes. Speaking from personal experience, my most successful real estate investments were in properties that were in sound structural condition but needed cosmetic upgrades. And finally, shop for your next home when others are not. When everyone leaves for summer vacation, be in the market. When winter arrives and everyone is focused on holiday celebrations, be in the market. When income taxes are due and everyone is feeling a bit cash strapped, be in the market. There is such a thing as good or bad timing on a property, and in many cases, it may come down to a few weeks.
As the market takes a breath, there may not be a better time to find your forever home.
Please don’t hesitate to contact me to map out a strategy that works for you.