Negotiating Buydown Strategy for Sellers

Reduce the price? or Buy down the interest rate?

Here's a great buydown strategy just sent to me today:

This rate buy down strategy will help sell your listings faster and help you respond to that low ball offer. In a competitive market to get a buyer, this could be a strategy that will make you (seller or agent) shine above the rest and solidify the close of escrow.

Question: Should you reduce your sales price or should you reduce your Buyer's interest rate?

Monthly Obligation

1. Did you know that a price reduction of $20,000 on your listing will save the buyer $103.00 per month?

2. The same $20,000 in buying down the interest rate will save the buyer $541.00 per month!

Qualifying

1. Did you know a buyer of your $450,000 listing needs $96,000 in income to qualify for the loan.
2. Did you know a buyer of your reduced $439,000 listing needs $94,200 in income to qualify for the loan.
3. Did you know that if you took that same $11,000 dollar reduction and paid down the interest rate, that listing needs only $74,400 in income to qualify for the loan.

Listing Scenarios:

Listing One-Listing Price $750,000.00--DOM=120, Payment=$3,453.00.
Price Reduction to $725,000--Payment=$3338.00, DOM=130.

Listing Two-Listing Price $750,000.00 and effectively reduced with a seller interest rate buydown. (Interest Rate Buydown Cost $12,750.00 to $19,125.00) DOM-?, Payment $2,922.00 , Sold! Saving the buyer over $45,000.00 in five years.

Listing One (Reduced)-Down Payment ($108,725.00) and Loan Closing Costs ($9,000.00) = $117,750.00 at the closing table.

Listing Two - Down Payment = $112,500.00 at the closing table. Loan Cost paid by sellers.

Listing One- Income Needed- ~$98,000.00

Listing Two- Income Needed- ~$87,000.00

Listing Two, with a buy down strategy, saves the buyer over $45,000.00 in five years and over $95,000.00 in ten years.

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Decline is in Sales Volume, Then Prices

Follow the pink line to the end of the first quarter--March 31, 2008--to see the continuing trend of sales volume falling at a much steeper curve than sales prices for Long Beach.

Tighter loan guidelines and less available funds for loans keep fiinancing tight for even the most qualified buyers, giving cash buyers a distinct advantage in this market.

The median sales price for Los Angeles County is $431,950, a decrease from February's median of $477,650--this data does not include condos. (These figures are not representative of the average price of homes in all communities, but are priced on homes that actually sold.)

Per California Association of Realtors, the March data is:

Statewide, the 10 cities and communities with the highest median home prices in California during March 2008 were: Newport Beach, $1,198,500; Danville, $990,000; Santa Barbara, $977,500; Redwood City, $872,500; Mountain View, $862,000; San Clemente, $842,000; Sunnyvale, $806,500; San Ramon, $790,000; Redondo Beach, $774,000; San Francisco, $755,000.

In spite of the overall California median price for a single family detached home decreasing to $413,980, 29 percent decrease from the revised $582,930 median for March 2007, some communities have median price gains compared to one year ago: Mountain View, 25.8 percent; Sunnyvale, 15.2 percent; Redwood City 12.9 percent; Yorba Linda, 10.4 percent; San Ramon, 7.6 percent; Ridgecrest, 7.6 percent; Claremont, 6.7 percent; West Hollywood, 3.6 percent; Laguna Niguel, 3.3 percent; San Francisco, 0.7 percent.

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Orange County Sales Are Moving Up

Is 23% the critical number for Orange County sales? Yesterday I got all excited about an Orange County Register article by Jonathan Lansner entitled "Homebuying demand jumps 23%, expert says: Wave of first-time buyers causes number of properties in escrow to soar vs. a year ago" and went looking for the link online. Had a hard time finding that article online, but found this byline about LA/OC home prices by Mr. Lansner as being down 23% this year. In spite of that, here's a quote from the article,

"Demand for Orange County housing is growing, according to Steve Thomas at Re/Max Real Estate Services in Aliso Viejo. As of Thursday, 2,374 houses and condominiums had gone into escxrow in the past 30 days, a 23 percent gain vs. a year ago."

Market absorption time is reportedly 6.55 months at the current rate if all properties currently in escrow are sold, a much shorter period of time than 10-11 months inventory supply in other markets.

If anyone finds the online article, please let me know!

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The Terms in Your Offer to Purchase

In a 10-page contract, there are quite a few terms and conditions to cover with a buyer when they're writing one with the agent, or with sellers when they receive one from an interested buyer. If using a Realtor as your agent, then you should be using the standards forms with the California Association of Realtors logo imprinted at the top and which are used statewide in residential transactions (logo at right). This post won't answer all questions, by the way, your own case will be individual to your concerns and interests.

• Expect to take some time meeting with your agent the day you make an offer. It's pretty hard to do in five minutes (as I've had some people actually expect). You need to understand buyer contingencies; you should have already contacted a loan officer and bring a letter or certificate or pre-approval with you to the meeting; and be prepared to write a check for the deposit money, which will be held in trust by your agent until submission to escrow.



• The Loan: While funding the loan could remain a contingency throughout the escrow (it's negotiable with the seller), obtaining your down payment and costs of the loan is not, and the contract says "buyer shall act in good faith to obtain the designated loans"--which means that even if one source in this volatile market may no longer be able to help you, you have to do your very best to find another loan in order to honor your agreement with the sellers. After all, you said you would buy the house from them, they've made their arrangement to move one, they may in contract themselves with another purchase they worked hard to find and negotiate, and they're counting on you to perform. Also, you should have already worked out what monthly payment you're comfortable with, because if your agent does not write in a maximum interest rate for your loan on the contract, you could be legally obligated to pay any interest rate, no matter how high.


• Escrow Time: This is another negotiated item, both the provider and the length of time. The usual time is 30 days, but what if the buyer has to give notice, or sell, or what if the seller needs more time to move out, or has a contingency to buy a new home; or what if the buyer's loan is FHA which typically takes a little longer for cosing ... then 30 days might mean 45-60 days. AND, if you decided to purchase a "short pay" property, your escrow time would more likely be 60-90 days because most banks aren't working that quickly on those approvals ... so then if you're financing that property, your interest rate environment could change in that period of time. Be prepared.


• The Appraisal: The appraiser is sent out by the lender to appriase the property, and often the contract requires the buyer to remove that contingency within 17 days. The seller wants to move one, and the buyer wants to know the selling price and appraisal are in agreement. This is just one of several areas where if there is no agreement, the buyer may cancel (not will, "may"). Appraisal reviews are more common, take up additional time in escrow, and even if they don't delay the close, nerves could be frayed over this issue.


• Buyer Inspection(s): This is a major contract contingency, so on the day the buyer has his/her physical inspection, you should be able to follow the inspector around as much as possible and ask questions, or certainly at the end, and most certainly when you get your report, which also the seller receives. Because the buyer has only so many visits to the property before it closes, it's tempting to use that time for home decorating ideas and measuring for furniture. But later on, if an issue comes up, you the buyer might wish you had paid more attention to that inspector while he/she was there, and whom you paid for the inspection.


• Are tenants currently living on the property? Make sure your contract covers their departure or their continuing occupancy.


• Seller Disclosures: The contract spells out the timeline and the nature of these disclosures, and the buyer right to cancel. Carefully look at the Transfer Disclosure Statement, and if you still have questions, take the time to follow up with your agent. The seller is supposed to disclose known defects, but the sellers don't always know absolutely everything about their property. Buyers must do their "due diligence", which is the buyer is given 17 days and a separate buyer inspection form to let them know all the issues to look into if necessary. There are other numerous documents to sign, including the natural hazard report, California tax report, lead-based paint, water heater, smoke detector, and other required or recommended forms, as much as 17-18.


• Taking Title: You need to instruct the escrow officer , and if necessary, get legal advice about how to do this, whether you're single, divorced, married, have a trust, etc. Are you taking joint tenancy, community property with right of survivorship, sole proprietor? How title is taken can affect future legal rights.

These are just a few of the basics of dealing with an offer, other issues include dealing with homeowner associations, liquidated damages and arbitration/mediation. Buying or selling a home is a significant event for most people, it's important to set aside the right amount of time for it. The more you prepare yourself in advance the less chance you will have buyer or seller remorse about how your transaction was handled. Dian Hymer's "Starting Out" is a good publication for buyers.

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Meet Web 2.0 for You

Want to find out about types of shops in your current neighborhood, or one you're thinking about moving to? Type in an address at http://www.walkscore.com for an area map.
If you want to stop writing lists on pieces of paper and put them in one place where you can share them, try http://www.tadalist.com, a free service that lets you share them publicly or privately. For an online word processer for uploading your documents, there's www.zohowriter.com , and for uploading spreadsheets, go to http://www.docs.google.com and open a free account with Google. Reduce large e-mail files for easier sending at http://www.gigasize.com.

Historic Renovation and Property Tax Benefits

The Mills Act was enacted in California in the 1970's, but is now much more widely known due to its 40-60% reduction in property taxes for qualified properties.

Effective March 7, 1973, Chapter 1442 of the Statutes of 1972 (also known as the Mills Act) allows an owner of qualified historical property to enter into a preservation contract with local government, which establishes its own criteria and determines how many contracts they will allow. When property is placed under such a contract, the owner agrees to restore the property if necessary, maintain its historic character, and use it in a manner compatible with its historic characteristics. the authority to enter into contracts, which are for 10 years at a time and stay with the property when transferred, with owners of qualified historic properties who actively participate in the restoration and maintenance of their historic properties while receiving property tax relief.

"A qualified historical property is privately-owned property that is not exempt from property taxation and that also meets either of the following criteria:

• The property is listed in the National Register of Historic Places, or is located within a registered historic district; or

• The property is listed in any official state, county, city, or city and county official register of historical or architecturally significant sites, places or landmarks, including the California Register of Historical Resources, California Historical Landmarks, State Points of Historical Interest, local landmarks, and local survey listings of historical properties."

Long Beach is one of the cities which participates in this program, here is a contact list for all California cities: http://www.parks.ca.gov/pages/1074/files/mills%20act%20contacts.pdf

For more information or a map of local historic districts, please contact me at 562-896-2609.

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Properties are Selling in Southern California

It's that time of year when the weather is warmer, and traditionally there is more market activity, so what's happening now in local area cities? How many properties are currently in escrow?
For residential properties (houses, condos, townhomes, own-tour-owns, coop units) as listed in the MLS:

1. Long Beach - 397 (March closed esrows - 165)
2. Huntington Beach - 215 (March closed escrows - 104)
3. Cerritos - 42 (March closed escrows - 24)
4. Lakewood - 121 (March closed escrows - 49)
5. Seal Beach - 33 (March closed escrows - 30)
6. Los Alamitos, including Rossmoor area - 16 (March closed escrows - 16)
7. Bellflower - 50 (March closed escrows - 14)
8. Cypress - 49 (March closed escrows - 15)
9. Costa Mesa - 74 (March closed escrows- 44)

If the above figures are any indication, the sales activity has increased overall. There are factors such as length of escrow time and seasonal activity, however, the overall decline in the median sales price combined with higher loan limits available are factors as well. Check the March zip code chart for sales trends in your area.

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The Best Buyer's Market in 35 Years

In April of 1973, mortgage rates were about the same as they are today. Since that time, we have only had mortgage rates this low during 2001 and 2002, the height of the seller's markets where there was little inventory. In the last two major buyer's markets, one in the early 1980s and the other in the early 1990s, the rates were much higher. When I started in the business in 1994, interest rates were at 9.5 percent, (and they were at 18 to 21 percent in 1980). In the early 1990s, the rates were hovering in the 11 to 12 percent range. Thus, today's buyer's market, with exceptionally low mortgage rates plus a substantial supply of inventory, is the best time in decades to purchase.

(Thanks for the plug from Berniece Ross!)

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Water Wise Landscaping in Southern California

This is the time of year when thoughts turn to outdoor lawns and gardens. This year, some planning, and awareness of new laws, can save you some money.

Water conservation is a growing focus in a land that used to be a desert before all the swimming pools were added. Los Angeles' Metropolitan Water District developed a BeWaterWise website several years and (I still have a few CDs) for native plant gardening, classes, and irrigation systems installation. See the Water Calculator to assist with your climate's and soil's watering needs on a season basis.



The City of Long Beach recently passed an ordinance for saving water, and limits landscape watering to specific days (Monday, Thursday and Saturday) and times. Pressure washers (under pulldown menu at "Water Conservation") are to be used instead of hoses if absolutely necessary for outdoor use. The city Water Department is sponsoring landscaping classes during April, May and June focusing on irrigation systems and installation, and "California-friendly" plants. Certain neighborhoods are already popping up with water-efficient landscaping, and looking very attractive. There are also a few rebate programs offered by the City for using certain water-saving toilets, rotating sprinkler nozzles which use 20% less water and reduce runoff, and high-efficiency clothes washers (HECWs). In Orange County, rebates are also offered for synthetic turf and timers.

Long Beach Market Absorption Rates

The absorption rate is how long the current inventory will remain on the market at the current rate of selling. In all price ranges shown, there are more properties currently in escrow than have closed escrow in the last 30 days. Hopefully that means that the economic stimulus package and temporary increase in loan amounts is bringing a surge in activity.

Here are several different listing and selling price range categories for all properties (commercial/residential but mostly residential including large multiunits) in Long Beach listed on the MLS as of 4/9/2008:

$1 million plus listing price:
260 active listings; 10 sold in the last 30 days at an average of 107 days on the market; Market Absorption Rate is 26 months. But in this price range there are currently 26 in escrow (backup and pending).

$600,000-$699,000 listing price:
207 active listings; 17 sold in the last 30 days at an average of 76 days on the market; Market Absorption Rate is 12 months. There are 34 in escrow (backup and pending).

$500,000-$599,000 listing price:
296 active listings; 31 sold in the last 30 days at an average of 98 days on the market; Market Absorption Rate is 9.5 months. Currently there are 56 in escrow.

$400,000-$499,000 listing price:
433 active listings; 41 sold in the last 30 days at an average of 87 days on the market; Market Absorption Rate is 10.5 months. Currently there are 88 in escrow.

$300,000-$399,000 listing price:
476 active listings; 29 sold in the last 30 days at an average of 75 days on the market; Market Absorption Rate is 16 months. Currently there are 75 in escrow.

Per the MLS, there are 2664 active listings and 443 properties in escrow in Long Beach.

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