Quite a few temptingly-priced fixer-uppers have popped up near my office recently. (This one’s asking price was $290K. It sold for $500K.) I asked Mark Hannum from HomeStreet Bank how I could get my hands on one of these beauties. Here are my notes:
When you apply for a regular mortgage, the lender would typically want major defects – say, the lack of a roof – to be addressed before accepting a house as your loan collateral. But with rehab financing, such as the HUD 203(k), you can get one single loan to buy AND renovate a fixer.
To get a rehab loan, you first need licensed contractors to provide written bids. Your lender then appraises the property as-as, and estimates its post-repair value. This prevents you from putting more money into a project than the market would justify.
Your loan amount would be based on your purchase price, plus the cost of work to be performed, plus an added contingency for cost overruns. After closing, your contractors are paid from an escrow account. If you don’t use up the entire amount, whatever is left will be applied to the loan principal.
HUD 203(k) loans are only available for owner-occupied homes. Your down payment could be as low as 3.5%. Repair work must start within 30 days of closing and be completed within 6 months. You’d have to let the loan “season” for a year before you can refinance based on the post-repair value. You may now have 20%+ equity, so that you no longer have to pay mortgage insurance.
Fannie Mae’s HomeStyle Renovation loans may be more cost effective for borrowers with good credit scores. They’re available to owner-occupants and investors and allow up to a year to complete renovations. Unlike 203(k)s, which require all work to be done by licensed contractors, you can DIY part of a HomeStyle Renovation project (up to 10% of as-completed value).
Mark also mentioned the possibility of conventional financing with an escrow holdback. This may offer a lower interest rate. Let’s say I’m interested in a roof-less house. The seller or I could ask a contractor for a written estimate, then set aside 150% of this amount in an escrow account, so that my lender could be assured that they would have a newly roofed home as collateral.
Did you see this New York Times article about a 62-year-old Stockton, CA woman who wakes up at 2:15am for a crazy commute that gets her to work at 7am?
The writer points out that the median home value in our heroine’s neighborhood is $300K, versus $1 million near her San Francisco office.
A couple of months ago, the Seattle Times also wrote about mega-commuters, such as a Rainier Valley resident who spends 90-minutes each way getting to and from Bellevue.
At the moment, there are only 12 Bellevue homes for sale with price tags under $1 million, versus 50+ listings in the 7- and 8-figures. As for $300K homes? You won’t find them anywhere near Rainier Valley. In fact, it’s slim pickings unless you’re willing to travel south of Tacoma.
Back in February, King 5 cited a Inrix ranking in which Seattle was #23 out of 1,064 cities worldwide for awful commutes. On the bright side, for now, at least, Inrix says traffic conditions are better here than in LA or San Francisco.
PS – Check out this 2016 rent price study which showed that New Yorkers were willing to pay $56 per month for every minute they can shave from their commute.
At today’s mortgage rates, the monthly payment difference between a $300K and $1M house is around $3,300-$3,500. If you divide these amounts by $56/minute, the point of fair trade-off between owners of $300K and $1M homes is no more than 62.5 minutes of additional transit time.
A couple of weeks ago, Joe and I toured a 720 SF house while it was on the market. He wasn’t a fan of the outdated plumbing and I hated that the washer and dryer are in an exterior closet. Still, it was undeniably adorable.
Last Sunday, I noticed that the house had sold for $702,000! I spent the evening feeling out of sorts. Doesn’t it seem wrong for so little space to cost so much?
Monday morning, Ted and I toured a couple of $1.3 million homes, which suddenly looked like amazing bargains.
As it turns out, the high-priced shocker was just a data entry error. The listing agent retracted the $702K price. The house is under contract, but the sale hasn’t closed. (8/23 update: it sold for $512,500.)
All this drama reminded me of a recent workshop where an appraiser came to talk to our office about market value. As Realtors, we’re used to sifting through large numbers of offers for popular homes. In these cases, prospective buyers fall into 3 categories:
1. Optimistic bargain hunters will make super low offers that sellers will scoff at. Still, their mere presence fires up the competition.
2. The majority of hopefuls will submit offers that fall within a relatively narrow price range. This is because everyone comes to an inevitable consensus after carefully studying the same list of recent sales nearby.
3. And finally, the wildcards. These folks want the house at whatever cost and they have the resources to outbid everyone else. When multiple wildcards get into a bidding war, it’s not at all inconceivable that a 720 SF house could get not one, but several, $700K offers.
If you, as a seller, are in this fortunate situation, your Realtor will now try to convince the buyer’s appraiser that $700K obviously reflects the market value, as that’s what multiple parties are willing to pay.
However, as our appraiser friend pointed out, banks are not in the business of betting on unknowns. In the worst case, if the loan goes bad, they would be stuck trying to resell the property. Unfortunately, during any given sale, no one can predict how many “whatever it takes” buyers will come through. So to play it safe, they wouldn’t want to lend beyond the #2 range. This is why prospective borrowers end up getting dreaded low appraisals.
But because many #3 buyers have the ability to pay cash, or increase their down payment when they aren’t able to borrow as much as expected, most crazy sales do close at “whatever it takes” prices. This means the next wave of buyers will base their offers on higher reference points. I am relieved that for now, $700K won’t come up as a sale comp for 700 SF homes.
Thanks to Virginia‘s introduction, I had coffee with Ric Harter from Kiel Mortgage and learned a whole lot about HECM (Home Equity Conversion Mortgage), an FHA-insured reverse mortgage program for borrowers 62 and over with significant equity in their homes.
HECM borrowers don’t need to have any income, nor are they required to make any payments, so long as they continue living in the home. Even if the housing market completely tanks and the home’s value falls far below the loan balance, neither borrowers nor their heirs would be responsible for the shortfall.
HECM proceeds are not taxable and don’t affect social security eligibility. Borrowers can opt for monthly payments, a line of credit or a lump sum. They retain title until the property is sold upon their death, or when they move out.
Some seniors use HECMs to pay off traditional mortgages, to eliminate the possibility of foreclosure if they’re unable to keep up with loan payments*. Others leverage their existing home’s equity to purchase a new home. There’s even an “HECM for Purchase” program that allows non-home-owning seniors to borrow about half the cost of a home they intend to buy.
On the downside, HECMs can be expensive. Since they are “rising balance” loans, each month’s interest is added to the loan balance, on which the following month’s interest is calculated. And in addition to an upfront mortgage insurance premium of 0.5% or 2.5% (depending on whether the loan is under or over 60% of the appraised value), the FHA charges an 1.25% annual premium, which is calculated based on a rising loan balance.
If you’re curious to know more about reverse mortgages, drop me a line. If I don’t have the answer you’re looking for, I’ll find out for you, stat.
(* HECM borrowers can still face foreclosure if they aren’t able to maintain home insurance coverage and stay current on their property tax bills. Also, the elimination of mortgage payments means they won’t get to deduct mortgage interest on their taxes.)
Last year our office did this silly dance at the Rainier Valley Heritage Parade. We’ll be back for a repeat performance tomorrow. The parade starts at 10am sharp. If you want to catch us, come early! We’re 8th in line.
At our practice session on Wednesday, there was much discussion over those signs we’re holding. Dorothy claimed Rainier Beach. Larissa went for Hillman City. Virginia couldn’t decide between Jefferson Park and Mount Baker Rowing Center. I took Bryn Mawr.
Have you been to Bryn Mawr? If you’re looking to buy a house, you should consider going for a visit. And soon! Until recently, this still sort-of-affordable neighborhood was a well-kept secret. But while hosting an open house for Ted‘s client, I kept a tally of where prospective buyers currently live: Greenwood, West Seattle, Newcastle, Central District, Burien, Capitol Hill, Pioneer Square, Rolling Hills, Green Lake, Seward Park, Mercer Island, East Lake, Renton, UW…
$425K was the reason why all these folks made the trek. 14 made offers to buy this house, which pushed its price quite a bit higher. But for now, other nearby options at this price point do come up. Let’s go check them out! And on the way there or back, we’ll visit Elvis and the Cat in the Hat at the amazingly awesome Skyway Grocery Outlet.
I spent this morning at a class on title and escrow. To illustrate the value of title insurance, Lisa Umbelino from CW Title offered this attention-getting case study:
A homeowner has huge windows facing the neighbor’s backyard. Shortly after she moves in, the neighbor builds a deck in said yard, and begins using it for hot-tubbing in the nude. The homeowner looks into building a fence. In the process, she discovers that the neighbor’s deck encroaches upon her lot by 5 feet. She mentions this to the neighbor, who ignores her. She then calls her title insurance company, who persuades the neighbor to modify the deck rather than face a lawsuit.
You might not realize that title insurance protects homeowners against any future encroachments that may arise, but it’s true! And the protection lasts as long as the homeowners OR their heirs hold title.
That’s what it feels like, thanks to Windermere’s relationship with Demco Law Firm. Most real estate transactions go smoothly, but when issues arise, consequences can be dire and Demco is always amazingly quick to respond.
Earlier this week Lars Neste from Demco stopped by our office to talk about legal hot topics affecting real estate buyers and sellers. At the top of his list was wire fraud. Example: A crook hacks into an escrow company’s email system. He contacts buyers for a soon-to-be-completed transaction and tells them there’s been a change in wiring instructions. The buyers send $275K to a fraudulent Wells Fargo account. The following day, they hear from the real escrow people and panic ensues. The unsympathetic seller threatens to call off the deal.
In this case, Demco was able to help all parties obtain a reasonable resolution. The escrow company stepped in to provide interim funds and much of the stolen money was ultimately recovered. But the takeaway was, NEVER wire funds to ANYONE based only on email instructions. Call the real recipient to verify the account info. Also, be very suspicious of changes in wiring instructions.
Lars also brought up risks associated with direct email communication. Example: A seller emails the buyer’s agent directly, promising offhand to pay for certain repairs. He later regrets his generous offer and wants to renegotiate. Lars thought the buyer might have legal grounds for saying no, because what, really, is the difference between expressing consent via email versus putting your electronic signature on a document? The two actions very clearly show the same intent.
However, if it was the seller’s Realtor who told the other party that the seller might be willing to consider whatever repairs, the seller would NOT have been on the hook. The moral of the story was, buyers and sellers should be very cautious of direct communication with the other party or their agents, lest they incur legal obligations without careful consideration.
We also discussed the fine points of customizing escalation clauses and debated the value of offering low appraisal coverage when a buyer has already waived his financing contingency, but those stories will have to wait until another time.
Did you grow up in a house? I didn’t. I spent my childhood in Taipei, where everyone I knew lived in highrise apartments. Throughout my days in Chicago and DC, I continued to be an apartment dweller.
My first house was an impulse purchase. For the same price as a small DC condo, I could have 2 bedrooms, a basement and a yard? Sold! The day I moved in, my new neighbors pointed out that my gutters were overflowing. I wasn’t sure what they meant.
But over the next few months, I learned to use power tools and got comfortable with climbing extension ladders. I took a woodworking class and a plumbing/electrical repair workshop. I built a catio! My cats thought this was a fine thing.
I made many, many trips to Harbor Freight. If you’ve never been, their closest store is in Georgetown and I’d love to take you there – especially if you’re thinking of making the leap from apartment to single family home. It’s a wonderland of tools that you had no idea you needed – and some that are totally awesome and surprisingly durable. My chop saw, for instance, cost $99 back in 2009. It still works perfectly.
I used to work at a magical place called Everyone’s Internet. The company was based in Houston; I lived in DC. I visited once every few weeks but refused to move closer because… Houston?
The heat! The traffic! The time it takes to get anywhere! The very same conditions you’ve experienced during this week’s heat wave and Seafair traffic!
More seriously, though, I was saddened to see this Zillow Research article comparing homelessness here versus there. Zillow’s statistical model showed that in Seattle, a 5% increase in average rents would add 258 to the homeless population. In Houston, the same percentage rent increase would put 120 out on the streets.
According to Marilyn Brown, President and CEO of the Coalition for the Homeless in Houston, “by 2020, we will have fixed the system such that no one who enters homelessness need be without permanent housing for longer than 30 days. We’re in Texas. We put a man on the moon, so we figured we could put them all into housing.”
Which reminds me of this Seattle Times report back in June about home ownership among black families. In 1970, 49% of King County households headed by a black person owned their homes. Nowadays, it’s down to 28% — versus 71% in Houston and 60% in DC.
Seattle needs to do better, don’t you think?
According to this report by ATTOM Data, homeowners near a Trader Joe’s have seen an average 2012-2017 home price appreciation of 67%, compared to 52% near a Whole Foods and 51% near an ALDI. (In case you’re wondering, the closest ALDI is in Bakersville, CA.)
Inman (sorry, paywall) points out that Zillow did a similar 1997-2014 study showing that homes near Trader Joe’s and Whole Foods appreciated twice as quickly (148% and 140%) as the national average (71%) during this time:
Before either a Whole Foods or Trader Joe’s location opens its doors, homes near the soon-to-be-opened store appreciated at the same pace or slower than the typical home in that city. Once these locations open, this relationship changes. Homes near either store begin to appreciate faster than the average home in the city.
Whole Foods and Trader Joe’s are not simply piggybacking off already hot neighborhoods. Rather, it appears both chains are either incredibly smart about finding neighborhoods on the verge of gentrifying, or the opening of either location positively impacts home values.
I think it’s not either or, but both. I saw it first hand in DC. A Whole Foods came to my once crime-ridden neighborhood (Logan Circle) and wham! Property values nearby took off and that store immediately became one of Whole Food’s busiest DC locations. So, considering the rapid rate of gentrification that we’ve already seen in South Seattle, don’t we deserve some consideration from Trader Joe’s?