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Due to the Fed’s latest interest rate increase, housing prices are likely slide even more. If you want to future-proof your business for 2023, you must be prepared for two critical conversations: how to price and market your listings so they stand out from the competition and how you assist your buyers in purchasing their next home at the best possible price and terms.
Part 1 of this series outlined how to help sellers set realistic prices on their listings as well as incentives sellers can use to attract more buyers. What may surprise you, however, are the wide variety of ways you can help your buyers minimize costs on their next home. Based on previous down markets, here are nine steps to take.
Don’t settle for pre-approval; obtain an underwritten pre-approval
Because mortgage interest rates are so volatile, have your buyers obtain what is known as an “underwritten pre-approval.” This means the lender has run the buyer’s credit and should be able to fund once the appraisal and title work is complete. This helps your buyers close before any additional rate increases.
Conduct an in-depth buyer interview
Instead of just asking about what location, price and bedroom-bath count the buyer wants, dig deeper by asking about the buyer’s lifestyle, hobbies, recreational activities, pets, plus how and where they spend most of their time when they’re at home.
Establish your search criteria
Buyer agents in 2023 are about to experience something that we haven’t seen for over a decade — a wealth of choices to show your buyers. Here’s how to narrow your search.
Search the MLS
In addition to searching for new listings on the MLS, also search for expired listings and properties with price reductions.
Search the portals
Under “Listing Status,” Realtor.com allows you to search for most of the same features that you will find on your MLS, as well as “Priced Reduced,” foreclosure properties, plus a new feature, “commute time.”
Zillow provides “Coming Soon,” For-Sale-by-Owner listings, and foreclosure listings.
Select the right properties to show
Ideally you want to show properties that are in good condition (unless your buyer wants to buy a fixer) and that are priced under market. This is where it’s critical to have a strong mastery of the inventory so you can spot which properties are the best fit for your buyers and are well-priced.
If you are a new agent or are working in an area where you don’t have an in-depth mastery of the inventory, visit Realtor.com and search under “property value” to locate their new RealEstimate tool for a property-specific evaluation.
The RealEstimate provides a chart like the one below. This allows you to not only track how a specific property has changed in value during any given period of time, but also the value their algorithm is predicting between now through January of 2023.
Please note in the chart below that two of the valuation provider estimates are almost identical at $346,600 and $346,590. When this occurs, this price is probably very close to the property’s correct value.
Search for properties that qualify for Down Payment Assistance (DPA)
Unfortunately, the bulk of the American public mistakenly believes they must put 20 percent down to purchase a home. Most buyers have no idea that if they have good credit, they can purchase with as little as 3.5 percent down.
Even less known are the wide variety of programs that provide DPA not only to first-time buyers but to repeat buyers, as well. In fact, did you know that 84 percent of the properties in the United States qualify for DPA, and that the average amount of DPA that was provided through at DownPaymentResource.com (DPR) last year was $17,000!
To quickly determine whether down payment assistance is available for a specific listing you plan to show, visit Zillow and click through the mortgage tabs to “down payment assistance.” Zillow has partnered with DPR to display all the down payment programs available for all listings posted on their site.
To illustrate this point, I searched for properties under $500,000 near where I live. One of the townhomes I found was listed at $485,000 and had 12 programs providing up the $24,250 in down payment assistance. Buyers can see what programs they qualify for by clicking on “Check eligibility.”
Here’s one other important fact about DPA. These programs can be layered together. For example, if you have someone who is former military, works as a firefighter, and is married to a teacher, that’s three different DPA programs that couple may qualify to receive.
Having this information is also critically important in a buyer’s market, especially when it comes to attracting first-time buyers. In previous downturns, first-time buyers accounted for as much as 50 percent of sales. In fact, one of the best marketing tactics for 2023 is to conduct a marketing campaign featuring DPA.
Search for properties with seller incentives
In Part 1 of this series, I listed incentives that sellers can use to attract more buyers. As a market devolves from a seller’s market into a buyer’s market, seller incentives will explode, especially in the new home market.
Examples of seller incentives you can request when negotiating include:
- Have the seller purchase a one-year home warranty for the buyer.
- Ask to include the big screen televisions, furniture, and other decorating items in the purchase price.
- Ask the seller to pay the buyer’s moving expenses.
- If the property has an HOA, ask the seller to pay the buyer’s HOA dues for the first 6-12 months the buyers are in the property.
Locate the best possible financing
This can be a daunting task, but one where you can provide your buyers with excellent resources. Here are some options:
- In terms of locating the best possible lender, Best Money has ranked their top 10 lenders.
- One of the most important criteria in today’s increasing rate environment is being able to put a property under contract and for the lender to lock the buyer’s rate for 90 days. An increasing number of major lenders are now providing this service.
- Even when the buyer decides on a lender, there are so many types of loan programs it can be very confusing. The chart below is from BankRate. To access this information for your buyers, click on that link and then alter the search parameters so they fit your buyers’ specific search criteria.
- In terms of evaluating the numbers on this chart, ask your buyer which is most important to them—obtaining the property with minimum upfront costs, having the lowest payment possible, or the overall cost of the loan during the first eight years they own the property?
How this scenario normally plays out is that fewer upfront costs normally result in higher monthly payments. No matter whether your buyers prefer less money upfront or lower payments, always look at the “8-year cost” to identify which lender is charging the least for their loans over time.
Seller 80-10-10 financing
Because of the incredible run up in prices over the last few years, many sellers are sitting on a considerable amount of equity.
To illustrate how this works, if the buyer is purchasing a property for $300,000, rather than having to obtain 90 percent loan that will have additional points as well as Private Mortgage Insurance (PMI), the seller could offer to carry 10 percent of the purchase price for the same rate as the buyer’s mortgage or perhaps one or two percentage points higher.
By avoiding PMI, which is typically 0.5 percent to 1 percent of the loan amount, on a $300,000 mortgage, that would be $1,500 to $3,000 per year. PMI stays on the property until the buyer as an 80 percent equity position. If that turned out to be five years or more and the PMI was 1 percent, the buyer would save a minimum of $15,000.
Provided the sellers didn’t need the money for some other purpose, they would also benefit by earning a greater return on the second trust deed than they would almost anywhere else. Best of all, it would be secured by a Deed of Trust against a property they once owned.
RED Hot Trend: 2-1 buydowns
Seller buydowns can be used as an incentive to attract buyers but can also be a powerful way to help buyers minimize their costs for the first two years, (or in the case of 3-2-1 buydowns, the first three years.)
According to the Washington Post,
A buy-down is a mortgage financing technique in which the buyer obtains a lower interest rate for the first few years of the mortgage. It is a way for a borrower to obtain a lower interest rate by paying extra cash at closing so their monthly payment is based on an interest rate that is typically 1 percent to 2 percent below the note rate. The first-year rate on a buy-down is often referred to as the “start rate.”
For example, the interest rate on a 2-1 buy-down would be 2 percent below the note rate for the first year and 1 percent below the note rate for the second. Then years three through 30 would be at the note rate.
In terms of how much a buy-down will cost, the Washington Post goes on to say:
For a buyer who makes a down payment of 20 percent, the cost to fund the escrow or buy-down account for a 2-1 buy down is about 2 percent of the purchase price or about 1.7 percent of their loan amount. The dollar amount required to fund the buy-down account is a calculated amount needed to supplement the buyer’s discounted payment over the two-year period.
Who pays for the buydown?
The escrow or buy-down account can be funded by the seller, the buyer, the lender or a third party, such as a realtor. Getting the seller to accept a concession to fund the account is usually the most beneficial scenario for the buyer.
To see how much a buydown will cost for your buyers, use the Buydown Calculator from CMG Financial to calculate 3-2-1, 2-1, and 1-1 buydowns.
If you’re ready to be one of the agents who not only survives, but thrives in the 2023 market, implement as many of these as you can as soon as possible. You’ll be glad you did!