Pikes Peak Homes and Land
Chris J Clark, REALTOR®
Broker/Owner
Phone (719) 464-5839
Chris@PPHAL.com

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Buying a Home…Ask for a CLUE Report

People purchasing a used car have most likely heard of CARFAX vehicle history reports to help them avoid buying a car with costly hidden problems.  Less likely are buyers to know that there is a way to discover some of the repair history of homes they are interested in.

Lexis Nexis C.L.U.E. (Claims Loss Underwriting Exchange) is a claims history database that enables insurance companies to access consumer claims for the previous seven years when they are underwriting a risk or rating an insurance policy.

An insurance underwriter could identify a previous claim for substantial damage to a property and try to find out whether the repairs were completed properly before assuming the risk as a new insurer.  Similarly, a buyer could benefit from knowledge of former claims that may affect the value of the property or possible, future repairs.

A CLUE report can discover insurance claims on a home to investigate whether the repairs were done properly.  These reports are not directly available to potential buyers, but their property casualty insurance agent could order a report subject to successful negotiations with the seller to agree on a contract of sale.

If a buyer had a CLUE report on a home that they were buying and were concerned about specific issues, the buyer could address those things with the inspector during the inspection period.  Conversely, the CLUE Report could detect items that may not be visible during a home inspection.

In some cases, a listing agent might suggest a seller get a CLUE report in the spirit of full disclosure to potential buyers.  Even if there were claims and the work was done properly, a high number of claims could affect the premium paid by a new homeowner.

A current homeowner can request one free CLUE report every twelve months online or by calling 888-497-0011.  They can also email consumer.documents@LexisNexisRisk.com.  Please be ready to provide your first and last name, social security number, driver’s license number and state in which it was issues, date of birth, current home address and phone number.  For more information, see Lexis Nexis Consumer Portal.

If a buyer doesn’t have a property casualty insurance agent, your real estate agent can recommend one.

Coordinating the Sale and Purchase of Your Home

Usually, it is easier to buy a home than to sell a home but that isn’t necessarily the case currently. In today’s market, it can be scary to sell your home before buying another because you could find yourself without a home.

Most sellers will not accept a contingency on the sale of a buyer’s home in today’s market.  So, let’s look at some of the alternatives that homeowners are using to facilitate the transactions.

If you have the income, credit, and cash available, the replacement home can be purchased with a new 80-90% loan-to-value mortgage and sell the existing home after you have moved into the new home.  This would require making two payments for a while but probably gives the seller the least amount of pressure to find the replacement property before the existing one is put on the market.

If the mortgage on the new home has the option to recast the payment, additional down from the equity in the previous home after it sells would lower the payments without causing any additional expense to refinance.

Another alternative may be available if your home has enough equity to borrow against it in a Home Equity Line of Credit or a bridge loan.   This type of loan is generally made by banks who will loan qualified owners up to 80% of the appraised value less the current mortgages on the property.  Freeing up the equity in your existing home will give you a down payment for purchasing the new home before you sell the previous one.

If a seller has assets in qualified retirement programs, it is possible to do temporary loans against them to facilitate the interim purchase.  There can be penalties on some of these if they are not repaid in a timely manner.  It would be good to investigate with your tax professional to see if this is a viable option.

Hard money lenders provide a source that will be more common to investors than homeowners.  These types of loans are generally approved and funded quickly, have less requirements than bank loans and provide funding for projects that cannot be financed elsewhere.  Interest rates are higher than bank loans, are written for short terms (1-2 years), and usually require 25-30% down payment or equity.

Power Buyers and iBuyers offer to purchase your home for cash and provide a quick closing.  Deeper investigation into these options may reveal that you will not receive the full equity of your home because they have to discount the home to cover the expenses they will incur as a seller.

In today’s very complicated market, the value of a real estate professional representing your best interests, providing you advice, options and experience has never been greater.  While there are similarities in transactions, each one is unique, and you certainly need a professional to be guiding you through the process.

Agents are trained and experienced in coordinating the purchase and sale of homes.  This can be especially beneficial in navigating unfamiliar waters.

A New Opportunity for Homebuyers

You may not have heard of anyone assuming an existing mortgage for over thirty years and didn’t know they were even possible any longer. The reason is simple, it didn’t make financial sense but now that interest rates are increasing, it may be an opportunity for some homebuyers.
Conventional loans added clauses to mortgages back in the early 80’s that gave the noteholder the right to raise the interest rate if a loan was assumed, as well as require the new buyer to qualify for the loan. This essentially ended the practice of assuming conventional mortgages.
Then, in the late 80’s, FHA and VA mortgages did impose the right to qualify the new buyers, but the big difference was that the mortgage rate would remain the same as the original borrower. Even so, it still effectively ended the assumptions of FHA and VA mortgages because rates on mortgages trended down for the next thirty years.
There was really no benefit to assume a mortgage that still required qualifying because it was possible to obtain a new mortgage with a lower rate. Generations of buyers have never even contemplated assuming a mortgage but now, in 2022, it might well be an alternative that will lower the cost of buying a home.
Mortgage rates hit a bottom in early 2021 and have been increasing since, this year especially.
Since qualifying is required for assuming an FHA or VA mortgage and only owner-occupants are eligible, you might be asking what are the benefits? If the interest rate on the existing mortgage is less than the rate on a new mortgage, there could be a savings.
In addition to that, there are fewer closing costs involved on assumptions of FHA and VA mortgages than originating new mortgages. Another benefit is that assuming an existing mortgage will be further into the amortization schedule than a new one which means equity-buildup occurs faster. And finally, lower interest rate loans amortize faster than higher rate loans.
The rub in this situation is that many buyers don’t have enough money to purchase an equity but there is a remedy for that. Let’s assume the buyer was considering a 90% conventional loan. If they identified a home with an assumable mortgage, they could put the same 10% down payment in cash, subtract the existing mortgage balance from what would be the 90% new mortgage and secure a second mortgage for the difference.
There are lenders that make this type of loan and buyers need to shop and compare rates and fees on them just like they would if they were getting a new first mortgage. Your agent can suggest lenders for second mortgages.
Most search filters on portal websites do not include assumable mortgages. You will need to rely on your agent to ferret them out. If the agent you are working with hasn’t suggested assumptions, it may be that they are unaware of their existence.

Cost of Waiting to Buy in Both Price and Interest Rates

Have you ever been shopping on a website where you were looking at something that was on sale?  You were interested in it but there wasn’t a sense of urgency and maybe, you had a lot going on and didn’t get back to it for a few days.  When you did go back to the website, the price on the item had returned to its regular price.

How did you feel?  Did you go ahead and purchase it for the current price?  How did that make you feel knowing that if you had acted more decisively, you would have saved money and had the product by now?

In 2021, homes across the United State went up 19.1% on average.  There were some markets where the prices soared 30 to 40%.  Fortunately, last year the mortgage rates did remain relatively stable but that isn’t the situation this year, in 2022.

At the end of 2021, economists from Fannie Mae and Freddie Mac, felt like prices would go up around 7% for 2022.  The Mortgage Bankers Association and the Home Price Expectation Survey predicted more like 5% and Zelman Research and the National Association of REALTORS� forecast closer to 3%.

While the number of sales did decline at the end of February 2022 to 7.2% month-over-month and 2.4% year-over-year, that could be explained as a lack of houses for sale.  In the same month, inventory was 1.7 months which is down from 2 months in February 2021.  The median sales price had a year over year increase of 15.0% to $357,300.

The Fed had their first of what may be four or five interest rate hikes this year to try and get control of the inflation rate.  We have already seen mortgage rates at the 4.5% price and that is for borrowers with the best credit.  Those with less than sterling credit can expect to pay more.

It is anyone’s guess at where rates will end a year from now, but many experts think this decade of low rates is over and we’ll not likely to see them again.

There is a pent-up demand for houses to buy and an urgency to buy before the rates get higher.  If a buyer waits a year to purchase a home but the price goes up by 5% and the interest rate goes up by 1%, it will have a dramatic effect on the payment.

5% price increase 10% price increase
Sales Price $400,000 $420,000 $440,000
Mortgage $360,000 $378,000 396,000
Current Rate vs Possible 1.00% increase 4.5% 5.5% 5.5%
Monthly Payment $1,824 $2,146 $2,248
Payment Difference $322.18 $424.38
Additional Cost for 7 years $27,063 $35,648
Additional Cost for 30 years $115, 983 $152,776

 

If the appreciation is closer to 10% increase, the negative effect of waiting is exacerbated.

The equity in a person’s home contributes greatly to their overall net worth and wealth position.  The effect is very apparent in contrast to renters compared to homeowners whose net worth is 1/40th of the homeowners $300,000 or $8,000 for the renters.

As people stair step their way into larger homes to not only meet their increasing demands but also to enjoy the amenities of a nicer home, the equity will continue to grow based on two dynamics: appreciation and equity-build up.  The renters do not benefit from either of these.

To run your own comparison, using your own numbers and what you believe will happen in the marketplace, go to Cost of Waiting to Buy.  If you haven’t developed a plan to purchase in today’s market whether it be your first home or a move-up, you need facts and a trusted team of professionals to work for you.

It starts with finding an agent who will be as committed to find your home as you are.  We would love to help you or your friends.  It is what we do.

Instead of a vision, show them the house

Sellers try to rationalize not making needed updating and repairs to their homes before marketing them by saying they are going to let the buyers make their own personal choices. It is a convenient story to justify not going to the effort for the necessary market preparation to justify achieving the highest possible sales price.
An agent told a story of a home that was structurally sound being on the market, but it needed significant cosmetic work, like paint, floorcovering, updated fixtures, and lots of yard work. The house was vacant with the owner having moved out of town.
The agent explained to a prospective buyer what he thought it would take to bring the home up-to-date and what it would be worth. The buyer was from out of town and was going to be teaching at the university the next semester. He returned home without buying and came back to look again two months later.
As they were looking at homes with the same agent, the question came up about the previously viewed home that needed work. The agent told him that she had bought it and did all the things that she had suggested. The buyer asked if he could look at it. On seeing the property, now, in its pristine condition, the buyer asked the agent if she would sell the home to him at a profit.
The agent told him that it wasn’t for sale but followed up to the buyer with a question of her own. “I told you that you could buy it for below market and gave you an estimate of what it would take to update it which would have you in the home below market value and with all the colors and choices of your own. Why didn’t you buy it then?
The buyer admitted that it looked like a lot of work and that he just didn’t feel up to the challenge. The main thing was that he just saw a lot of work and couldn’t really see the finished product.
This story is not novel; it happens frequently. Buyers are not experienced enough to recognize what needs to be done, how much it would cost and how long it would take. In many cases, they don’t have the connections with the different service providers. In some cases, they simply can’t imagine what the home would look like after the renovations are made.
There are some buyers who scout out opportunities for do-it-yourself experiences where they can earn sweat equity by buying below market and making the repairs to add value to the home. There are many more buyers who don’t know how and/or may not want the hassle and are willing to pay a higher price and be able to “move in” to their new home.
The highest prices being paid for homes are the ones in the best condition with the best locations.
The highly popular TV series Fixer Upper now, on the new Magnolia Network, uses this situation for the premise of each show. People want to buy a home in great condition but can’t find what they want. Chip and Joanna find a good home in a good neighborhood for them and sell the vision of what it could be. The unique aspect of the show is that they act as agents, designers, and contractors to meet the buyers’ budget.
In the case of Fixer Upper, the buyer is the beneficiary of the increased equity for having taken the risk to make the repairs. For the seller to be the beneficiary, they need to do the updating and repairs before marketing the home.
Ask your agent if they can provide suggestions of what items would most benefit from remodeling and if they have service providers that they can recommend. The proceeds from the sale of your home belongs to you and to maximize them, it needs to sell for the highest possible price. Your agent can work with you to make that happen.

Equity Give Homeowners Options

Americans have seen the equity in their homes increase by 29.3% year over year in the fourth quarter of 2021 according to the CoreLogic Homeowner Equity Insights.  The average home equity gained $55,000 during the same period.

CoreLogic’s Home Price Index reported a 19.1% increase in appreciation for the previous twelve months ending in January 2022.  This increase in value is fueling the increased equity that homeowners are experiencing.

Some homeowners are doing cash-out refinancing and using the funds for a variety of purposes like home improvements, investing, saving for retirement, college or rainy-day funds.

Other homeowners are seeing the increased value of their homes as an opportunity to move up to a home that meets more of their current lifestyle.  In some cases, adult children have moved back home, and in others, working remotely has made their current home not as ideal as it once was.

Homeowners now realize that their home has been quite the investment and are willing to re-invest in a larger home that meets their current needs.  With their increased equities and mortgage rates still under 4.00%, they can get into a home for a relatively small increase and the higher value home will continue to increase.

One way to justify moving to a larger home is to estimate what your equity would be in the old home in a specified number of years from now compared to selling it and buying a larger home to see what the equity would grow to in the same period.

A $400,000 home appreciating at 4% annually would be worth $526,000 in seven years compared to a $600,000 home appreciating at the same rate that would be worth $789,000 in the same time frame.  This doesn’t tell the whole story because the mortgage amounts are different.

The comparison in the table below doesn’t show the higher payment on the larger home but can be explained by the benefits of enjoyment and practicality of having a larger home to live in during the comparison period.

Hold or Sell & Buy Analysis

Hold Current Home
Current Value $400,000
Value in 7 years at 4% appreciation $526,373
Unpaid Balance … Original mortgage $225,000 @ 3.5% for 30 years $191,350
Wealth Position $377,998
Sell Current Home & Buy Another Home
Equity from Sale after 7.5% sales costs $178,650
Purchase Price of New Home $600,000
Value of New Home in 7 years $789,559
Unpaid Balance – 75%Mortgage @ 4% for 30-years EOY 7 $387,268
Wealth Position $424,863
Difference in Positions $46,864
Percentage Increase 12.4%

 

To make your own analysis, use the Hold or Sell & Buy  Contact us to find out what your home is worth or to help you with any questions you may have.

The Dynamics of Home Equity

Appreciation and amortization are key factors in building equity for homeowners with mortgages.  As the home goes up in value due to appreciation and the unpaid balance goes down due to amortization, the equity increases.

Appreciation is the increase in value of a home and is usually measured year over year.  In recent years, appreciation has been robust (19% nationwide in 2021) due to high demand and low inventory.  Many times, the news will quote annual appreciation rates from a national or regional level.

Occasionally, you may see a chart that tracks the annual appreciation over a period, but it is more interesting than it is practical.  It can be used to determine an average rate over a longer period that you can use to project future growth.

The reality is that supply and demand determine appreciation along with location and condition.  To reflect more accurately what your individual home has appreciated, you’ll need to find local numbers which your real estate professional can provide.

The amortization of a loan is consistent with regular monthly payments based on the term of the mortgage.  Homeowners frequently receive a monthly statement, either through the mail or online, from their lender declaring the current unpaid balance.

If a homeowner makes additional principal contributions toward the loan, the unpaid balance will accelerate the normal amortization schedule.  Additional principal payments on fixed-rate mortgages shorten the term of the mortgage.  Additional principal payments on adjustable-rate mortgages will lower the payment on the next anniversary date.

Equity in a home is the difference between the value of the property and what is owed on in.  If there is no mortgage on a property, the equity and value of the home are the same.

To illustrate how equity is influenced by appreciation and amortization, let’s look at an example of a $400,000 purchased today that appreciates at 3% a year using a 90% mortgage at 4% for 30 years.  The $40,000 would grow in seven years to $182,135 in equity with $91,950 coming from appreciation and $50,186 from amortization.

If the appreciation in the same hypothetical example is increased to 5% annually, the equity would be $253,026 with $162,840 coming from appreciation and the same $50,186 from amortization.  The same loan amount, rate and term will result in the same unpaid balance as the example with lower appreciation.

With the considerable appreciation experienced in recent years, the values are going up fast and benefit the people who currently own a home while making it more expensive for would-be buyers.  Another factor facing buyers is rising interest rates.

It is important to get the facts about the market and your individual situation to determine what alternatives you have to purchase a home in the near future.  Your agent can provide this objectivity and recommend a trusted mortgage professional to be pre-approved.

For more information, download our Buyers Guide.

Remodeling As It Relates To Value

While updating and remodeling certainly makes a home more enjoyable and livable, and increases the value, homeowners should not expect to recover 100% of the cost of the remodeling.  Certainly, remodeling and updating makes a home sell faster, some of the expenditures will not return their full cost, although, some do return more than others.

Exterior home improvement projects rank 11 out of the top 12 for the highest return on investment for homeowners according to Remodeling magazine’s 34th annual report.

The top two places included a garage door replacement and manufactured stone veneer which estimated a 94% and 92% cost recovery.  The choice of materials slightly affected the cost recovery such as siding replacement varied from 69% for fiber cement and 68% for vinyl.  Similarly, vinyl window replacement inched out wood by the same percentages of 69% and 68% respectively.

Some of the other outside improvements included steel entry door replacement at 65%, wood deck addition at 63%, and asphalt roofing replacement at 61%.  The lone interior improvement in the top twelve was a minor kitchen remodeling at 72%.

Repairs to a home are necessary to maintain the livability of the home, as well as the fair market value.  As homes age, improvements are major expenses that update the home and give it the feel of a newer property.

Some improvements are for pure personal enjoyment such as putting in a high-end, professional grade gas cooktop.  If the homeowner is a foodie and enjoys cooking, this could bring much enjoyment, but buyers may not add the increased value over a midrange cooktop commensurate with the value of the home.

If a homeowner has been using a bedroom for an office, sometimes, the agent might recommend that they return it to a bedroom so that people can recognize it for what it is.  Even though this isn’t a far stretch of the imagination, professional stagers would probably agree.

On the other hand, if the functionality of a bedroom had been changed such as to be a extraordinary master closet for the adjoining bedroom, it could affect the value negatively.  If most typical buyers for that home would value the transformed bedroom more, they might discount the price by the cost to make the conversion back to its intended use.

One major question to consider before embarking on remodeling projects is how long you intend to stay in the home?  The longer you are going to be in the home, the more opportunity you must personally enjoy the improvements.  This is especially important if the expected return on the cost is small.

Another consideration should be to determine if you are you overbuilding the neighborhood.  There is a principle in appraisals called conformity.  All homes in a neighborhood should be of similar size, quality, and amenities.  Homes that are overbuilt will be brought down in value by the smaller ones.  Conversely, smaller homes could be elevated in value based on most of the homes being more expensive in that neighborhood.

If an investor were doing a fix and flip, they could evaluate a situation and decide on what to do to a home to maximize the value.  For homeowners, it isn’t the same thing because they are living in the home and don’t really consider return on investment the same way as an investor.

Homeowners certainly want to recapture as much as they can but realistically; they need to consider that there is a personal cost to most improvements that will not be reflected in the final sales price.  The popularity of Remodeling magazine’s annual cost vs value report gives homeowners an idea of what they can expect to recapture.

One final thought.  Homeowners should keep track of the money they spend on improvements because it raises the basis of their home which will lower the gain.  Because this calculation isn’t made for an unknown number of years into the future, many homeowners neglect to make a record.  When they do need the number, they either estimate or forget about the expenditure.

A capital gains register is a useful document that can be kept with your important papers.  Download this Homeowners Tax Guide for a copy and more information.

Assumptions Make Sense Again

Existing FHA and VA mortgages are assumable at the note rate to owner-occupied buyers who qualify.  This can be an alternative to paying higher, current rates and benefit buyers with lower closing costs while saving money on the payment.

For the last 20 years, rates have been steadily coming down and there was no reason to qualify for the assumption when a new loan had a lower interest rate.

Assuming an FHA or VA loan with a lower interest rate will obviously mean lower payments but it will also build equity faster because the amortization schedule is advanced from a new 30-year mortgage.  Another benefit is that the acquisition costs on an assumption are much lower than starting a new loan.

In the example in Table One, a couple bought a home two years ago for $400,000 with a 3% FHA mortgage that has principal and interest payments of $1,656.  It is now worth $435,000.

Let’s look at a hypothetical situation involving the sale of this home after two years.  The savvy listing agent explains that the home may have additional marketability due to the assumability of the FHA mortgage in place.

In scenario #1, the buyer purchases it for $435,000 with 10% down payment at the then, current rate of 5% for 30 years.  The principal and interest payment is $2,102.  If the home appreciates at 4% annually the equity will be $230,989 in seven years.

In scenario #2, the buyer purchases it at the same price with the same down payment but assumes the 3% mortgage with 28 years remaining.  Since he doesn’t have enough cash to buy the equity, he gets a second mortgage for the balance at 5%.  The combination of the payments on the first and second are $1,739 or $363 less than the payments in scenario #1.

In seven years, the $363 savings accumulated to $30,492.  The future equity is $21,457 larger on the assumption because the first mortgage is at a lower rate and the loan is amortizing faster.  In this example, the buyer is much better off assuming the FHA mortgage.

There will be a challenge in identifying which homes for sale have assumable FHA or VA mortgages because for decades it didn’t make much difference to list it in the description.  Many MLS’s are not even including fields for existing mortgages.

Finding the “Right” home for a buyer is important but equally important is finding the “Right” financing.  Not all agents have the training or the tools to identify the possible opportunities for buyers but the ones who do are invaluable.

Some Should Consider an ARM

Adjustable-rate mortgages are not the right choice for many homeowners especially, if they plan to own the home for a long time.  Less than 3% of buyers choose an adjustable-rate mortgage according to NAR’s 2021 Profile of Home Buyers and Sellers.  With fixed-rate mortgages hovering in the mid 4.00% range, it’s understandable that people select a rate that will not change over the term.

The buyers who know they’re only going to be in the home a few years should, at least, investigate an adjustable-rate mortgage.  Compare the cost and evaluate the risk of an ARM instead of a fixed-rate mortgage.

The payment on the ARM in the example is $223.25 less than that of the FRM.  The rate is locked in for the initial period which is five years on a 5/1 ARM.  This will save a buyer $13,395 in the first 60 months.

The lower interest for the initial period is an obvious advantage to create savings but another dynamic that takes place is that lower interest rate loans amortize faster than higher interest rate loans.  In the example shown, the unpaid balance on the ARM is $6,165 less than the fixed-rate mortgage creating a total savings of close to $20,000 for the ARM in the first five year period.

This comparison estimates the breakeven point on this example to be 7 years and 1 months.  That is when the savings during the initial period will be exhausted based on interest rate adjusting the maximum allowed at each succeeding period. This is a worst-case scenario because ARMs are adjusted according to an independent index that the lender has no control.  The payment can adjust downward just as it can adjust upward.

Even if a person knows they are not going to be in a home for five years or less, their tolerance to risk may cause them to choose a fixed-rate mortgage.  With the difference in rates being so close, some people might think the fixed rate is safer in case their plans change and they end up living in the home a longer period.  Still, for the person who feels comfortable with the uncertainty of changing payment, the ARM may save them money.

For an estimate of what it could save you based on your price range, use this ARM Comparison and you can see the current FreddieMac rates on fixed and adjustable loans.  Call us at {Contact.PhoneNumberBusiness} for a recommendation of a trusted mortgage professional.