The American homebuyer is rapidly changing.
There’s no question about it, today’s home buyer is not the same compared with just four or five years ago. The impact of the economy and the shifts in lending standards have caused real estate professionals to change tactics and strategies to keep up with the changes. The best in the industry take advantage of the current challenges and set themselves apart by exceeding their customers’ expectations.
A Diamond in the Rough, Or Just a Shiny Stone? The majority of properties currently on the market are distressed. This means the sellers are having a hard time keeping up with their payments, or the property has already been taken back by the lender, or is in the process of being taken back. Purchasing a distressed property adds to the time and complexity of the transaction and influences who the buyer is. If the previous owner was evicted through a foreclosure proceeding, chances are they’re less than thrilled with what’s transpired. Unfortunately, it’s not uncommon these days to find the homes they’ve moved out of completely stripped. From missing appliances, to missing sinks and toilets, even sometimes to air-conditioning units being stripped of their copper coil, properties are left in differing levels of disarray. This is in contrast to heightened vigilance by Lenders and federal Agencies like the FHA and VA to ensure any property involved in a loan meets the minimum safety and soundness requirements of their lending guidelines. FHA for example requires that all floors be covered (no exposed plywood) and all screens on windows be intact with no holes. More significant areas to look out for are electrical outlets left uncovered or wires not properly installed or grounded, and signs of potential structural damage, like leaky or damaged roofs or damage from wood-destroying pests like termites. Remember, if the loan for the property is going to be backed by the VA, a pest inspection is required if the property is in a “termite state” (
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/ref/sfh1-23a), but the Veteran is not allowed to cover the expense of that report. The Seller, Lender, or real estate agent can pay for the inspection, but deciding who will cover the cost of any repairs that come to light because of the inspection is another area to be watchful of, especially in terms of the removal of financing contingencies and closing deadlines. Keep in mind, however, that the average credit score of FHA borrowers is now well over 700, so today’s FHA borrower is far from the borrower of years past, when FHA loans were compared against Sub Prime loans and had average credit scores around 640. To help keep your buyer and closing remain on track, be sure to stay in constant contact with your mortgage professional teammate and work together regarding the scheduling, review and response to inspections. If repairs are necessary, a 203(k) loan may be able to help cover the expense, and sometimes sellers (both banks and people) are more willing to negotiate when they know they have a qualified buyer and the challenged condition of the property can be overcome. Open lines of communication with the Seller are also helpful and improve the negotiation process when the time comes to have those difficult conversations. Especially if the seller is a bank, their perspective is to dispose of the property and recoup as much as they can from the sale. Skillful negotiation and the use of reliable data may help persuade a bank to cover the cost of repairs, when they realize the holding cost of the property related to not selling it. Equally important is to know your clients and stay in constant contact with them. Keep them informed of the process and set realistic expectations. Especially if it’s winter and the property is located in Minnesota, be mindful that appraisals, repairs or improvements may be delayed due to weather. Just about the only loans available today with low down payments are offered with backing by the FHA, VA or USDA, so many first-time borrowers are utilizing these products. Combining the nuances of working with a first-time home buyer, the intricacies of a governmental loan, and a distressed property requires patience, great organizational skills and frequent and transparent communication. Remember, the worse a problem is, the more people you should tell and the faster you should tell them.
Skin in the Game In contrast to first-time home buyers, many of today’s buyers are professional investors from a country with a better economy and money to spend, or people previously reluctant to buy who have been saving for years and are finally ready to take the jump. Regardless of their situation, the common factor for many of these buyers is they have significant down payments, or don’t need a loan at all to buy the property. Buyers with resources to purchase a home outright used to be few and far between. However, since property values have dropped so significantly and the value of foreign currencies compared to the dollar have increased so dramatically, a material percentage of people buying properties these days are doing so without obtaining a loan. This market used to be reserved for only the wealthy, but with properties in Baltimore, Detroit, and other areas hit hard by the economy selling for less than $25,000, some estimates put the percentage of all cash buyers at or above 30% of the total purchaser market. Working with a buyer with money to spend can expedite the process, but also puts more pressure on the real estate agent, since there’s no lender to scrutinize the appraisal, review the chain of title or sufficiency of the insurer’s coverage, or the other normal steps lenders take to protect both their and their borrower’s interests. These buyers also tend to be more demanding in terms of the timing of the process and especially with returned phone calls and communication. While recommending the use of well-qualified tax and legal professionals is something I do on every transaction, I would almost insist an all-cash buyer use the assistance of these professionals. As a real estate professional, we’re often asked to perform duties well outside our profession. Sometimes it seems like we’re marriage counselors, or interior designers, but the legal liability in providing bad advice is daunting. Including the appropriate professionals helps you focus on your specialty, allows the buyer to be adequately represented and informed, and also helps protect you from being accused of negligence or breaching a fiduciary duty.
Oh the Times They Are a-Changing Leading economists like Jay Brinkman and Mike Fratantoni, from the Mortgage Banker’s Association, have made poignant observations about today’s real estate market. One note I found particularly interesting is a difference in the familial and cultural impact of our current economic crisis. In the past, it’s been typical for children to move back in with their parents during recession or financial hardship. During today’s crisis we’ve seen this occur, but this time we’ve also seen a dramatic increase in the number of parents moving into the homes of their children. This is significant from a generational perspective, because of the impact it will have once we begin to recover from the crisis. It’s unlikely that these parents will re-enter the housing market as buyers in the same numbers as the children who move out of their parent’s home, but does likely indicate a need for additional rental properties, which are already at low levels due to almost non-existent new construction. What I find very interesting is many of these parents are using the equity they’ve extracted from the sale of their property to help their children become homeowners. Finally, we can’t discuss the current or future face of the home buyer without discussing the impact of technology. Just 10 years ago, ubiquitous websites like Facebook and Zillow didn’t even exist – let alone the iPhone and iPad, which are being used by potential buyers today to search and locate properties in real time well before they’ve even contacted a real estate professional. Multiple Listing Services have been in place for decades, but they were seldom available to consumers, and definitely not searchable from the web without interaction with a real estate agent. Today’s top professionals take advantage of emerging technology, like virtual tours and easily accessible neighborhood data. Technology has led to huge changes on the loan side as well. Consumers are now familiar and comfortable using the internet to search for loan offers, and even stores like Costco offer loans online though partnerships with approved lenders. Borrowers can apply, receive disclosures, e-sign and return them, get pre-approved and know the majority of the conditions they’ll need to close the loan, all online from the comfort of their home and without ever actually speaking to another person, in less than 20 minutes. Today Appraisers accept inspection appointments from their Smartphones and use data validation when uploading their reports to reduce errors or omissions. Real estate professional need to embrace technology and cannot rely on dated tactics. Sure, Open House Flyers should be left at Open Houses, but if people can’t find the information online, then an entire segment of the buying population will never see it. The pace of technological innovation and consumers’ dependence on it continues to increase, and this will have an impact on how we do our jobs and how we service our clients. As the age of buyers gets younger and technology becomes mainstreamed, we’ll need to continue to adjust to the changes by being available and providing services in-line with our clients’ expectations. [caption id="attachment_6469" align="alignleft" width="150" caption="Joshua Weinberg"]
[/caption]
Joshua Weinberg is a nationally recognized speaker, author, consultant, and leader in the real estate industry, specializing in integrating compliance and technology. He is currently Director of Compliance for First Choice Bank, a State Chartered and FDIC insured Depository institution, and Senior Vice President of Compliance for First Choice Loan Services Inc., its subsidiary. Previously he was one of the owners and COO of a real estate services firm in San Francisco, CA providing real estate sales, mortgage brokering and property management services. He can be reached for consultation or questions at [email protected].
