Archive for the 'Buying' Category
Financing Closing Costs
One of the most rewarding aspects of being a Realtor is being able to call a client and say, “Congratulations, your offer has been accepted - you got the house!” Amy made one of those calls just last night and, even though I was sitting a good four feet away from the phone, I could practically feel the buyer’s excitement. I couldn’t make out the words, but their volume and pitch increased significantly as they celebrated. It’s a very exciting moment.
It’s also the moment when the buyer realizes that they have to start rounding up the money for the purchase. The first deposit is submitted when the offer is accepted, the second deposit is typically due after the inspection contingency has been satisfied, and the remainder of the down payment is due at closing. All of these payments are cold, hard cash, the last two coming in the form of bank checks.
The buyer also has to have money available for closing costs. These cover the attorney fees and prorated expenses like heating oil and property taxes that the seller has paid in advance. It also includes the homeowners insurance that is paid in advance, as well as title insurance premiums for the bank and the buyer. Your agent or mortgage broker will be able to give you approximate closing costs for each house of interest.
Closing costs can be paid in two ways. Bring more cash to closing or accept a credit from the seller and roll the closing costs into the mortgage. Ideally, people would have enough cash to cover both closing costs and their down payments, but that doesn’t always happen in the real world. Sellers may offer closing credits, and buyers can sometimes negotiate them, but the reality is that they result in a higher purchase price. The higher purchase price must be accepted by the bank through an appraisal. And the amount of the credit is typically limited to 3-6% of the mortgage amount, depending on the mortgage type. Ask your mortgage banker for specifics.
The phrase “financing closing costs” is another way to say that they have been rolled into the mortgage. Once in the mortgage, they are charged interest and require regular payments. They are not broken out separately on the monthly statements and are quickly forgotten. However, the impact of financing closing costs can be calculated separately to help think about whether or not it is the right financial decision.
As a simple example, suppose a buyer financed $1,000 in closing costs using their 30 year fixed rate mortgage on which they are paying a 6.0% interest rate. Those closing costs would increase their monthly payment by $6.00 per month, and require total payments of $2,158 over 30 years. The information in the table can be scaled to any closing cost amount. For example, rolling $10,000 of closing costs into a 30 year mortgage at 7% would add $66.50 to the monthly payment and require total payments of $23,950. Just multiply the monthly and total payments by the appropriate factor, in this case 10 ($10,000/$1,000).
The point here is not that financing closing costs is evil and should be avoided like the plague. Although it is more expensive than paying cash, it is a perfectly valid strategy for coming up with the significant amount of up-front money that buying a home requires. And it is often the only viable strategy for younger buyers that have not yet built up enough savings to commit their cash to an illiquid investment.
The key is to understand how financing closing costs will impact the buyer’s overall situation and make sure that it is the right decision. For some buyers the decision is a trade-off between depleting their cash versus making a higher monthly payment. For others it is a choice between buying now versus holding off until the nest egg is a little bigger.
Most importantly, buyers need to plan ahead with their finances so that when they get the call from their agent they can savor the moment…
Congratulations, your offer has been accepted - you got the house!
Greater Hartford Real Estate Market Statistics- Quarter 3 2008
The wreckage from all of the bailout antics won’t show up in the real estate market statistics for a few months, but I have a feeling that the winter market is going to be starting a little early this year.
How did the housing market in Greater Hartford fair in Quarter 3 of 2008? Not fantastic. Here’s the latest Single Family data pulled from the Multiple Listing Service (deemed reliable, but not guaranteed)…
Observations…
1. The number of closed sales is down significantly for several towns. 11 of the 16 towns surveyed are off on closed units by at least 20%. Fewer buyers can get mortgages, some are taking a wait and see approach, and others have stopped looking altogether.
2. East of the River, Glastonbury remains fairly stable. Prices in South Windsor are up, but closed sales have dropped off a cliff. It will be interesting to see the final numbers for the year in South Windsor.
3. West Hartford continues to chug along as the strongest market in the area. Sales are up, selling prices are slightly up, and days on market is slightly less than 1.5 months. When will the party end?
And what’s happening with the inventory situation? There are more and more For Sale signs out there and they’re sticking around longer. In most markets, inventory increased when comparing last month to today.
Yellow indicates a Buyer’s market, defined as having more than 6 months of inventory. Towns with no highlighting indicate a Neutral market, neither Sellers nor Buyers have an advantage. West Hartford is the lone Seller’s market.
Pricing a Home - Price per Square Foot
Pricing homes is often more art than science. Some of the factors that play into a recommended pricing range are nearly impossible to measure or quantify. For example, how do you put a price on location? Everyone knows the old adage that the three most important factors in real estate are location, location and location. But how do you systematically assign value to such a complex quality?
The practical answer is that we look for similar homes that have either recently sold or are currently on the market. We then make adjustments to account for differences between the properties. One day, there will be databases that can quantify what we currently consider impossible to measure, but we’re not there yet. In the meantime we visit as many properties as possible so that we can rely on basic metrics and human judgement.
Price per Square Foot ($/SqFt) is one of the most common basic metrics used to quantify the intangibles. The $/SqFt of homes often differs greatly between towns as a result of the desirability of individual communities. Perceptions about crime and schools play into the values, as do the physical characteristics of the housing stock. The $/SqFt can even vary widely within towns if certain neighborhoods or streets are highly desirable addresses.
I decided to take a closer look at how the $/SqFt varies within one particular school district in one particular town. The main question I wanted to explore was, “Could I calculate the list price of a home if all I knew was how big it was?” Here’s what I discovered about the 28 homes currently on the market in the Norfeldt school district in West Hartford.
As one would expect, there is much less dollar variability in price for smaller homes as there is for the larger properties. Interestingly, there are two homes that are both about 5,500 square feet that are priced about $800,000 apart. There must be a number of factors at work to produce such a large price difference.
Knowing the size of a home is a surprisingly good predictor of its list price in this particular school district. Excel reports that our very simple linear model for pricing homes accounts for over 87% of the variability. So if I had a 2,000 square foot house to sell, the model suggests pricing it at $352,570.
Now let’s calculate the $/SqFt for all these properties and see what that tells us. First we’ll look at it as a function of the home’s price.
The best fit line once again slopes up and to the right - more expensive homes tend to cost more on a $/SqFt basis. I suppose this shouldn’t be surprising since high-end properties are more likely to have luxurious extras.
The most interesting result of this chart is that there is much more variation at the lower price points. Perhaps this is best explained by my friend Alan’s observation that here in Connecticut (as opposed to The South) two adjacent homes, even though they look exactly the same on the outside, can be completely different inside due to their level of updating. His previous experience had been that all houses in the neighborhood were very nearly identical both inside and outside since they were built as part of a large, recent development.
Out of curiosity I also plotted the $/SqFt as a function of the home’s size. In this case there is very little relationship and lots of variation at all sizes. Anecdotally, it is common to see smaller homes that are impeccibly upgraded and maintained with the highest $/SqFt.
Although it is by no means a perfect metric, understanding $/SqFt is important for both buyers and sellers as a proxy for the many intangibles of real property. Buyers should think critically about whether a property in which they are interested warrants a premium price. And sellers need to consider $/SqFt relative to their competition when deciding what to ask for their home. $/SqFt will likely be one of the many supprting data points raised during negotiations - but only after buyers fall in love.