JVM Lending: If appraisal comes in low…

…a buyer is not overpaying! Appraisals and market value can be a tricky math problem for buyers to figure out, but that’s why my friend Jay Vorhees from JVM Lending has put together this handy-dandy blog to explain. Take a look below:

When Appraised Value Does Not Equal Market Value

We have a buyer who was convinced she was “overpaying” for her property because her appraisal came in low. But, there were multiple offers for her property that were very close in price to hers, and there are nearby pending sales that are also similar in price. The entire issue has to do with appraisal guidelines. We repeat this often in this blog because the issue comes up so often: appraised value often does not equal market value.

Image result for house for sale

If there are multiple buyers willing to pay $850,000 for a property in an open market, then that property’s market value is $850,000. But, appraisers cannot appraise properties (in most cases) above the highest closed comparable sale in the neighborhood. So, if there are no closed sales above $800,000, that property will usually not appraise for over $800,000.

But, again, that does not mean the above property is not “worth” $850,000. Once this was explained to our buyer, she was no longer concerned about her low appraisal. This is something every buyer needs to understand in a fast-appreciating market where contract prices are tough to support in an appraisal.

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This is something I deal with constantly with my own clients. Jay hits the nail on the head here: appraisals may come in lower than expected, but it is not equal to a diminishing value on the property. For more helpful information like this, give me a call! I can talk about real estate all day 😉

What can bring down house prices and rates?

What could bring house prices and rates down? According to my friend Jay Vorhees at JVM Lending, it could be something called “monetary tightening,” or an experiment conducted by The Fed to infuse the economy with cash. Basically, what Jay is getting at, is that you’ll never know exactly when to buy or sell (or when a market dictates that decision), and that assuming you know the market intimately trying to time the market may be a mistake. Read on for more from our slightly-edited version of Jay’s blog:

Dude Sells Too Soon!

I was at a graduation party yesterday and the host told me how his law partner sold his Silicon Valley home two years ago because he was convinced the market had peaked.

It hadn’t. The poor guy’s former home has gone up another 20% since he sold, and so has his rent. The host made the further point that people should never try to time a market they are not intimately familiar with.

I like to remind everyone that nobody should ever try to time a market, no matter how much they know, because there are so many variables they have no control over – especially when those variables involve the Fed.

Elephant in Room: Monetary Tightening

There is a huge elephant in the room that nobody is talking about: Massive Monetary Tightening via Higher Rates and Quantitative Tightening.

After the meltdown, the Fed engaged in a massive experiment known as Quantitative Easing, where the Fed bought trillions of dollars of government bonds and mortgage-backed securities. These bond purchases increased the money supply by flooding financial institutions with cash in an effort to increase lending and liquidity. The Fed also lowered the rates to unprecedently low levels.

The low rates and huge capital infusion pushed up asset prices, particularly with respect to stocks, bonds and real estate. This is what usually happens when the Fed increases the money supply, and this is partially why we see such high asset prices now. Many people believe high prices are just a function of too much demand chasing too little supply, but that is not always the case.

Excess demand is often driven by excess capital in an economy; people want to park their capital somewhere, as opposed to letting it sit in bank accounts, so they buy assets. In any case, the Fed created about $4 trillion of new money up through 2016, and in 2017 they reversed the policy! They are now not only pushing up rates but also selling bonds with the intention of vacuuming about $2 trillion out of the economy.

This will likely have an adverse effect on asset and housing prices at some point. Do I think real estate prices will tank? No. I still like real estate because the fundamentals are so strong in many areas. But, I don’t think we’ll continue to see such strong appreciation, and now might be a good time for Silicon Valley lawyers to sell their homes.

Fed Could Reverse Again

Nobody is more aware of this than the Fed, and they are watching closely. If Fed policymakers see the economy showing excessive signs of softening, they could very likely change course again – and lower rates. Again, nobody knows what will happen because we have never seen anything like this before! We are in the midst of one giant experiment, and we all get to be the lab rats.

The Cost of Waiting

I generally encourage all my clients to be patient in the home-buying process. You’re looking for your dream home, and a house to call your home where memories are created. You want to exercise patience and really find the right place. However, at some point, waiting too long or sitting on the fence can have consequences.

As you’ll see in the blog from my friend Jay Vorhees at JVM Lending below, waiting too long on a home purchase can be costly. He highlights one particluar (anonymous) client who kept quibbling over small price differences and that stubbornness led to her not only missing out on her dream home, but settling for an entirely different town. To add insult to injury, the home she wanted has doubled in value since!

Read on to learn more:

COST OF WAITING IN 2012

In 2012 and 2013, we had a borrower looking to buy in Oakland and she was obsessed with getting the absolute lowest possible price.

As a result, she kept walking away from transactions, b/c of $5,000 to $10,000 price discrepancies, even though she was shopping in the $650,000 range in what was becoming the hottest market in the country.

The $10,000 differences she quibbled over worked out to be less than $50 per month in payment. What is most interesting is that she waited so long that she was ultimately unable to buy in her desired Rockridge neighborhood altogether, and she ended up buying in a suburb east of Oakland.

The houses she was bidding on are now worth twice what she was offering too. Her “cost of waiting,” or cost of not executing, was extremely high, to say the least. Unfortunately, her story is not unique.

RATES HIT 7 YEAR HIGH

According to this CNBC Report, “interest rates are surging to their highest level in seven years.”

And, it looks like they are going to continue to climb, based on continued strong economic reports and announcements by the Fed.

Despite the rate increases, the demand for housing remains very strong. In addition, property values continue to appreciate at a surprisingly fast pace.

COST OF WAITING IN 2018

These factors (increasing rates and appreciation) combined make the “cost of waiting” as high as ever.

In a recent National Real Estate Post Video, at about the 9-minute mark, Barry Habib uses a $500,000 Orange County purchase as an example.

At current appreciation rates, waiting even six months can cost a buyer an additional $200 per month, according to Mr. Habib.

Waiting a year can cost over $400 per month.

Pre-Qual vs Pre-Approval

People don’t understand how knowing the difference between pre-qualification and pre-approval can make a huge difference in an offer being accepted, and how the right choice can make them a stronger buyer. It’s extremely important! Luckily, my friend Jay Vorhees at JVM Lending broke it down for us:

Image: meyerpottsproperties.com

Panicked Borrower on Verge of Losing Deposit

We had a borrower in contract come to us a few weeks ago in panic mode. The reason? He was on the verge of losing his earnest money deposit b/c his loan had just blown up at America’s largest mortgage lender.

The loan officer had only done a “pre-qualification” and had missed a major issue with the borrower’s commision income. We were able to salvage the deal and still close on time, but the risk to the borrower was enormous.

Pre-Qualification vs. Pre-Approval

Most lenders only “pre-qualify” borrowers. Pre-qualifications consist only of a perfunctory glance at a credit report and a few income documents. Most lenders do not do full pre-approvals b/c they require so much more work.

Why Pre-Approvals?

We do full pre-approvals b/c they are absolutely necessary. Full pre-approvals (1) allow our borrowers to make non-contingent offers; (2) ensure there are no major issues missed; and (3) allow us to close in 14 days b/c we do all the work on the front end.

In other words, full pre-approvals make our clients’ offers far more competitive, and they eliminate stress for everyone – buyers, sellers, Realtors, escrow and us :).

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Image: Masonknowsmortgages.com

Full pre-approvals can take several hours, requiring us to review income, asset, employment and credit documents with a fine-toothed comb. But experience has shown that they are well worth the effort. 

Issues that can be missed with only a “pre-qualification” include the following:

  • missed 2106 expenses; 
  • unexplained and unusable deposits; 
  • side businesses with losses; 
  • K1 and partnership losses;
  • spousal and child support obligations;
  • lack of employment seasoning;
  • lack of bonus seasoning; 
  • lack of commission seasoning; 
  • debts not on credit reports

A major source of our business includes transactions that blow up at other lenders b/c the loan officers only did pre-qualifications. Realtors come to us b/c they know we can make the deals work and also b/c we can usually still close within the remaining contract time.

Compare and contrast: VA vs. FHA

VA and FHA loans are both backed or insured by the Federal Government, so realtors often confuse the guidelines between the two types of loans. There are a lot of differences, however, and my friend Jay Vorhees at JVM Lending has the scoop below:

Image result for FHA loan

Appraisals: Similar

We’ll just let this blog, by JVM’s Appraisal Manager, do the talking.  I, Kristin added a few thoughts in brackets afterwards.

Appraisers: Different

The VA loan forces people to use “VA approved appraisers,” which they assign. That often makes the quality worse. The FHA allows us to pick appraisers from whomever we want.

Property Condition: Different

The VA requires clear Section I termite reports, and clear Section II if the items are health and safety risks. FHA allows for “as is” transactions, and does not require a clear Section I.  (There have been some recent changes regarding this, but not every lender is aware of them)

Closing Periods: Different

For VA loans, you need 21 days to close them because appraisal turn times are slower, and it’s generally just a more cumbersome process. For FHA, we can close the loans in about 14 days.  (Note these are amazing turn times, most lenders need 30 days or more)

Rates: Similar

Both types of loans have lower rates than your typical conventional loans. Lower rates are a major advantage for both.

Mortgage Insurance: Different

VA has no mortgage insurance, which is one of the reasons this type of financing is such a great opportunity for veterans. The FHA, on the other hand, has a mortgage insurance of 0.85 percent for most loans, with less than 5 percent down.

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Up-Front Fees: Similar

The VA has a “funding fee” of 2.15 percent with 0 percent down that decreases with larger down payments. The FHA has an “up-front mortgage insurance premium” of 1.75 percent.

Down Payment: Different

The VA loan allows for 100 percent financing (0 percent down), whereas the FHA requires a minimum of 3.5 percent down.

(Final note:  most condo complexes are not FHA approved as they have not gone through the approval process which has to be updated periodically, I have not found that issue for the most part with VA because usually the complexes get VA approved at the time of building and it stays with the property)

Interest rates remain a gift

Recently, we’ve talked a lot about the rising interest rates. Everyone seems to be in panic mode over it, and my friend Jay Vorhees of JVM Lending is here to explain – in a historical context – why the reaction is overblown. He says the only people who should really be worried are businesses and companies that focus only on refinancing.

We’ve already touched on why higher interest rates are good, but an interest rate under 6 percent is amazing when put in a historical context, and should be treated as such. Here is a graph from Freddie Mac that shows an in-depth breakdown of interest rates over the past 30 years, but we’ve also shared JVM’s table on interest rates:

DATE                                      RATE                      COST
 
March of 2017                    4.2%                     0.5 Points

April of 2014                      4.34%                   0.6 Points

2008 (entire year)           6.03%                   0.6 Points

2000                                      8.05%                   1.0 Point

1995                                      7.93%                   1.8 Points

1990                                     10.13%                  2.1 Points

1985                                     12.43%                  2.5 Points

This shows that not only are rates much lower than they have been at the highest points of the market, but that loans are also much lower than usual – yes, I know our prices are higher than most of the country, but higher interest rates, always hurt you in the pocket book more than higher prices.  Anytime you can lock in a rate below 6 percent, you are doing quite well. So maybe now is the time to get into the market!

Why higher interest rates are good

This may surprise you, but higher interest rates aren’t always bad! In fact, sometimes they can be really good for the real estate market. Jay Vorhees at JVM Lending gives us some good reasons why. I’ve summarized those points below with commentary.

After the most recent presidential election, interest rates went up 3/8-1/2%, and the real estate market seemed to come to a standstill. It scared everyone into thinking that higher rates would severely impact the market overall. But, it was really just “uncertainty” that kept everyone on the sidelines, and not the higher rates.

Rates might continue to rise, but that’s a good thing, and here’s why:

  1. Slowly climbing rates often push would-be home-buyers off the fence. Higher interest rates heat up the market by pushing people to buy sooner, rather than later.
  2. Higher rates give the Fed “ammo” for the next recession. One of the Fed’s most powerful recession-fighting tools is lowering rates. But, if rates are already low, that tool becomes worthless. To restore the power of this, we need higher rates.
  3. Retirees and savers get higher returns. Artificially low rates that benefit big banks and borrowers hurt savers who live off of their savings. The higher the rates, the better for retirees and savers.
  4. Banks lend more money with high interest rates. There is a much better incentive to lend when rates are higher. More economic growth, higher wages and more home-buyers result from higher rates, too.
  5. Stronger dollar and continued tamed inflation. A stronger dollar makes traveling abroad cheaper, investing in the U.S. more appealing, and importing goods cheaper. Higher rates also keep inflation in check for a variety of reasons.

Higher rates hurt mortgage companies that rely on refinance business instead of purchases, and it hurts home-buyers to the extent that their payments will increase.

But the payment factor is often overstated. A rate increase of 1/2% might push a payment up about $150 for a $500,000 loan. That is real money, but it won’t break the bank for most of our borrowers whose income is well into the six-figure range.

What are your thoughts and how would higher rates affect you directly?

Applying for a Home Loan? See JVM Lending’s “Don’t” List!

Once you’re pre-approved, the last thing you want to do is knock yourself out of qualifying range. My friend Jay Vorhees at JVM Lending is a great source on this issue, as he’s seen hundreds of borrowers in this situation. Now, he sends them a list of “actions to avoid” with every pre-approval letter. Heeding his advice will help you at least prevent delays and extra paperwork. Take a look!

1. Do not make large deposits that can’t be explained. When you are trying to qualify, any large deposit – think $500 for a new mattress, or all-cash payments – must be explained. Otherwise, an entire account can become invalid and unusable for qualifying. Always keep a paper trail to make large deposit explanations easier!

2. Do not take on new debt. If you increase your credit card balances, finance a vehicle, or take on debt in another way, your ratios will be impacted and it will reduce your maximum purchase price.

3. Do not take vacation days if you’re paid hourly. A single day off work can push you out of qualifying range if your debt ratios are high and approaching your limit.

4. Do not spend liquid assets. Pre-approval software relies on specific liquid asset levels. So, pre-approval amounts can change if liquid assets are significantly reduced.

5. Do not miss payments on any debts reporting on a credit report. This one is pretty obvious, and you should avoid missing payments anyway, but missing monthly payments that reduce your credit score may also reduce your qualification amount!

6. Do not co-sign for someone else’s debts. That’s a dangerous maneuver anyway, but even if you’re just a co-signer, the debt will show up on your credit report. That makes you responsible for the debt and the payments.

7. Do not file taxes with a tax liability owing, or with less income than in previous years. This mostly applies to self-employed borrowers (especially during tax season). The most recently filed tax returns will be what the qualifying income is based on, and all tax liabilities must be proven paid. JVM recommends that borrowers file an extension when possible if they are making offers during tax season.

What to know about the new tax bill limits in 2018

The GOP finally pushed through its tax package, and the reaction has been interesting to say the least. While some seem to love it (The Wall Street Journal said the bill is the best thing to ever happen to our economy), many others hate it. Regardless of how you feel about the bill, it is signed in now and it’s time to see how it affects you, as a homeowner, seller or buyer.
My friend Jay Vorhees at JVM Lending put together a blog detailing some main points about the GOP tax bill and how it may affect real estate. Here are the main thoughts:
1. Current homeowners will be grandfathered in and still allowed to deduct interest against $1 million of mortgage debt. In 2018, buyers will be limited to $750,000 and interest against home equity lines will not be deductible.
2. State and local tax deductions will be capped at $10,000. This will be difficult for people in California.
3. Standard deductions are doubling to $12,000 for single filers and to $24,000 for married filers, so many homeowners won’t have to deduct their interest and property taxes anymore.
4. We have no idea what exactly the bill will do for the market when all is said and done, but for now, we can expect the low-inventory, high-demand market to suffer in high-end areas down the road, while remaining neutral in the short term.
5. To fully understand the bill’s impact on you, see a CPA. Defer your commissions. And if you’re planning an out-of-state move, consider relocating to a low-tax state like Florida, Texas or Nevada.
I’d like to expand on #5 quickly – as Jay mentioned, there will be a new $10,000 cap on tax deductions starting in 2018. If you paid off your property taxes before January, you should be able to save thousands of dollars on that by avoiding the new rule for a year. And if you are planning a move out of the Bay Area to another part of California or another state, you should be consulting a realtor or a CPA to see what kind of savings you can get!

Why rates went down after 4th Fed increase?

My friend Jay Vorhees at JVM Lending wrote another interesting end-of-year blog recently, regarding rates. Despite the Fed increasing rates for the 4th time in 2017, they are still down. Why is that, and how does it affect you?

In Jay’s blog, he notes that 30-year fixed rates have fallen 1/4 percent over the last year even though the Fed has done four increases. On that note, he asks why the Fed’s rate increases don’t push up mortgage rates?

In response, Jay gives two main reasons:

  1. Short-term rates don’t always affect long-term rates
  2. Many factors (besides the Fed) influence rates

Inflation, geopolitical strife, economic news and demand for credit and bank loans are the other main factors named by Jay. Most of those are very relevant in today’s societal and political climate. Basically, the Fed helps influence rates, but isn’t the sole influencer – if investors are pushed out of stocks or bonds into the other, due to war, a poor week on the stock market, etc., rates will change just as rapidly.

So, what does this mean for you?   Rates are going to continue to fluctuate. They are still low, so if you are considering buying, it might be a good time to get off the fence and make a move in 2018!