Do all home buyers purchase PMI (private mortgage insurance)?

What is PMI? Do all buyers need it? 
PMI - Hundred dollar bills, shape of house and words PMI and your mortgage

PMI, or Private Mortgage Insurance, is used when buyers have less than 20% down and are obtaining just one mortgage.

Who needs PMI? Who doesn’t?

Not everyone needs Private Mortgage Insurance.

If you have 20% to put down (your down payment), and it’s a regular or conventional loan, you do not need to pay for this insurance product.

Put another way, if you are obtaining one mortgage and it has a higher than 80% loan to value ratio, such as an 85% or 90% mortgage, you will buy the mortgage insurance.

A 10% or 15% down mortgage with just one loan will require PMI.

A way to avoid paying for this fee is to get an 80% first loan and a smaller second loan. The first loan won’t require the insurance. The second loan will have a higher interest rate, though. The advantage to this approach is that when you pay off the second mortgage, you are done with the higher cost.

On the other hand, if you have Private Mortgage Insurance and you want to be freed from it when your home value rises,  you’ll need to pay for an appraisal and hope that it comes out favorably. It can be a hassle to break loose of it.

If you’re purchasing with FHA backed financing, there’s mortgage insurance built into the product. (It’s government backed, so it’s just MI rather than PMI.)

Who is protected with PMI?

This type of insurance does not protect the consumer. Instead, it protects lenders in case of a default by the borrower.

 

Related reading:

What is mortgage insurance and how does it work? (From the Consumer Financial Protection Bureau)

Seller concession (this site)

 

 

 

Why are lease options to buy so unpopular?

Kitchen scene with the words Lease options to buy - the good, bad, ugly - why are they unpopularSometimes I’ll get an inquiry from someone interested in lease options to buy property in the San Jose area.  It’s been a while, but I remember that phone call pretty vividly.  “I’m tired of wasting money on the rent”, she explained.  Hoping to locate one, she was phoning the agents of San Jose houses for sale – maybe one of them would do a lease option?  Not likely.

Why are lease options hard to find in Silicon Valley?

It is a challenge to find a lease option in the greater San Jose area for a number of reasons, most of them related to the extra risks involved as opposed to simply renting or selling the real estate outright.

1 – Cash needed at close of escrow: An overwhelming majority of the home sellers here want their cash at close of escrow, so the buyers can be all cash or part cash and part loan (20% down, for instance).  Most real estate sellers want to take the cash from the property being sold and do something with it immediately – and the majority of the time that means putting it into another home in which to live.

2 – Don’t want to be a landlord: Doing a lease option means that not only will the owners of the property not get their cash right away, but they also have to become landlords in the meantime.  If they pay a professional property manager, that may cost 8% per month in overhead, too, so it cuts into any profit.

3 – Lease options are risky: With lease options, there is far more risk for the seller, of course, but also for the buyer!  (And by extension, real estate licensees who get involved with lease options.)

  • The seller risks a default by the buyer/tenant and then having to go through the trouble of evicting him/her/them.
  • Pricing risks for both seller and buyer:  the purchase price is decided upfront, but the sale isn’t finalized for a year or more.  During that time, the real estate market could appreciate like crazy (leaving the seller to feel that the house is sold for too little, less than market value) or the prices could fall (with the buyer unable to complete the sale since the property wouldn’t appraise – thus losing all of the down payment in the process).  Either way, buyer or seller could feel unhappy and cheated. (more…)

Will buyer’s agents become obsolete?

Buyer agent and clients viewing a home - Will buyer's agents become obsoleteReal estate is always shifting, and now that is more true than ever. Will buyer’s agents become obsolete with the cataclysmic transitions we’re facing? Today we’ll touch on:

  1. The role of expertise in real estate transactions
  2. What do buyer’s agents do?
  3. The impact of the recent NAR settlement and industry changes coming

Do consumers value expertise? If so, don’t expect that buyer’s agents become obsolete.

After all, a lot of data is online. The thinking goes, travel agents are mostly gone and journalists are being replaced by bloggers.  It’s possible that this will be the case for buyer’s agents in the future, as there is a trend in thinking that there are no real experts if everyone has access to information.

A few years back, I heard about a book that takes on this concept regarding expertise and it really resonated with me. The title is “The Death of Expertise: The Campaign against Established Knowledge and Why it Matters“. Confession: I have not yet read it, but want to do so. I did hear it discussed on KGO Radio by Pat Thurston, who was one of the radio personalities there, and her take on it was that it presents the concept that everyone’s opinion is as good as everyone else’s opinion.

That certainly does happen in real estate, along with the persistent idea among some consumers that buyer’s agents don’t really add any value other than unlocking doors. (I wrote about this idea that “it’s all on the web” so buyer’s agents aren’t perceived to be needed back in 2013.) Even this morning I had someone email to ask me if I would split my commission if they bought a home with me and would “do all the research”.  The answer, by the way, is no.

You can have a 20 or 30 year veteran Realtor with oodles of transactions, but a home buyer armed with a real estate app may not always know what he or she doesn’t know. And that’s dangerous. Information does not equal knowledge or skill.

Will buyer’s agents become obsolete? Before thinking that they will, learn what they do and what they know and why their clients appreciate them.

What do buyer’s agents do that consumers don’t do as well for themselves?

A good buyer’s agent will be able to help with these items (and many more, depending): (more…)

Estimating the Probable Buyer’s Value

The probable buyer’s value for a home is very similar to market value, as a home is only worth what a buyer will pay. If the seller wants more than that, it won’t sell. If it’s unlikely that their ranges overlap at all, we’ll have a listing that is difficult or impossible to sell.

Quick summary on the probable buyer’s value:

  • The probable buyer’s value is a range of what most buyers would pay for a particular property if there was no undue pressure on the buyer or seller.
  • The probable buyer’s value will be impacted by many factors, such as the timing (if there are other houses which are more competitively priced or no other inventory), the property condition, the presentation of the property, the accessibility of the property (how hard is it to see – is it vacant or occupied?), the marketing (photos, floor plans, etc.), and many other things.
  • The buyer’s terms weigh heavily on what the buyer can or will pay for any home.

Sometimes it can be tricky to estimate what a home might sell for. I usually talk with my seller clients about trying to find the probable buyer’s value.

In a balanced market, the seller may have a range of prices that he or she anticipates and would accept. So too with the buyer, whose range will likely be lower than the seller’s. The key is finding where the buyer and seller price ranges overlap.

In an overheated market, which we have now, it’s fairly simple to figure out the floor of pricing, a price point that is supported by past sales, but it’s harder to ascertain the ceiling, which is where very capable and driven bidders may take the price. Next, please find a long-ish (12:36 minute) video on price and terms, mostly regarding overheated markets, but some info on balanced markets, too. 

 

 

Balanced Market

In the balanced or more neutral market, buyers and sellers often have some common ground on valuation of the real estate. This chart below was used in the video above (for those of you who will skip the video):

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Why do sellers care if the offer has a loan or is all cash?

Image of $20 and $10 bills with the words "Why do sellers care if it's a loan or all cash?"Why are all cash offers such a big deal?

Buyers who are getting slammed out of the Silicon Valley real estate market due to low inventory and multiple offers are extremely frustrated. Part of the problem may be the amount of cash in their offer. It can be hard to compete with bids with smaller loan amounts or which are “all cash, no loans”.

The question arises all the time: why isn’t my 20% down offer just as good as the 50% down or the all cash offer? Isn’t 20% down good enough? Or for that matter, why wouldn’t a lower interest rate FHA backed loan be suitable?

All cash is better because there’s less risk

Twenty percent down is “good enough” if there are no other offers. If it’s multiple offers, though, it’s probably not sufficient for most sellers provided that the all cash offers are written with realistic pricing. Right now, about 15% of home sales in Santa Clara County are all cash, and sellers would far rather deal with an offer that includes no finance or appraisal contingencies.  For sellers, the fewer contingencies the better and no contingencies is ideal.  Particularly now, when we are seeing a very sudden and dramatic upswing in pricing, appraisal contingencies can kill an offer’s chances of success due to the fear of a low appraisal. With all cash, there is no appraisal at all – it’s a slam dunk on that front. (more…)

The percentage of all cash sales in Santa Clara County

The percentage of all cash sales (all cash, no loans) rose in July, but the actual number of sales, shown immediately below, shrank a little. I pulled this data from the MLS today and it’s reflective of whatever the listing agent entered into the fields for financing.

Number of Cash Sales of Single Family Homes in Santa Clara County

 

Percentage of All cash sales, month by month, in Santa Clara County (single family homes)

Next, the actual percentage of all cash sales in the county for houses and duet homes.

Percentage of All Cash Sales in Santa Clara County for Jan 2013 - July 2023

 

The average for the 11 Julys shown is 13.9%, so July 2023 with 15.7% is interesting to see. Interest rates have skyrocketed over the last 14 months, forcing home prices down in the 2nd half of 2022. It’s a little surprising that we did not see a surge of cash buyers then, but their numbers stayed in the typical range from what I’m seeing.

Now, in mid 2023, we have seen both interest rates and home prices rising – at least for the first 6 months of the year – in most of the valley.

Cash buyers are usually investors, but not always. Sometimes they are homeowners who sold their long held family home and are now downsizing and buying with the proceeds of the larger home that they just sold. We don’t get that piece of data from the MLS, but anecdotally, that’s what I’m seeing with the cash offers I’m seeing and hearing about.

 

What does it mean that cash buyers are an increasing percentage of the closed sales?

  • Rising interest rates not only don’t harm the all cash, no loans buyers, it actually helps them as it weakens their competition
  • These buyers may be feeling more confident with the softened market and easier buying conditions generally
  • My thinking when we saw interest rates rising is that it would help the mortgage free buyer more than anyone else – that seems to be the case.

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Is your property tax assessment too high?

In the 4th quarter of 2022, Santa Clara County home prices bottomed out after 6 months of interest rate hikes and sliding home values. The property tax assessment for many home owners on January 1st from the county tax assessor’s office may have been higher than market value for that day, depending on which comparable sales or comps that office used.

If your property tax assessment for this year came in a little higher than market value, you may be able to appeal that assessment.

 

Property tax assessment bill - the annual county tax assessor's office will issue the valuation to home owners on this card each September or October

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Appealing the property tax assessment

 

The county tax assessor’s office uses comparable sold properties, or comps, just like you or I would do, to try to determine the current market value of your home.  The comps used may or may not be the best or most realistic – they could be too dissimilar in size, location, or amenities, for instance.

If they aren’t good, you may be able to get your home’s assessed value, and hence the bill, reconsidered if you present better data and explain why your data is more accurate.

No one wants to see their property values depressed, but if it does happen, there may be a small silver lining: getting slightly lower property taxes, at least for a while.

 

How to appeal your property tax assessment

START HERE TO APPLY – you will find the prerequisites, the instructions, and the login to begin. (Have your comps ready!)

Information on appealing can be found on the county tax assessor’s office website.  This page has links and information on the process and procedures of appealing the valuation.

The appeal application form can be found here:  Assessment Appeal Application form

The folks in charge of the property tax assessment and appeal process, the review, and the hearing are:

Assessment Appeals Division
70 West Hedding Street
East Wing, 10th Floor
San Jose, CA 95110
Phone: (408) 299-5088
Fax: (408) 298-8460
Email: AssessmentAppeals@cob.sccgov.org

It’s actually very straightforward to appeal your property tax assessment: you simply complete the form and submit it online together with PDFs of your comparable sales to provide support for the lower valuation. The application form states at the end: “The request must contain the basis of your opinion of value. Please include comparable sales, cost, and income data where appropriate to support the value.”
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Rental property down payment

How's The MarketInterested in buying a rental property?  The first question to ask is if you want to buy it for cash flow or for appreciation.

Here in Silicon Valley, most investment buyers are looking for long term appreciation rather than to get a monthly source of income. In some areas of the country, you can put a small down payment on a property and break even each month. In other areas, that would create a negative cash flow situation.

Here in Santa Clara County, and the greater San Francisco Bay Area, rental values are relatively low when compared to purchase prices. That translates to a much larger down payment being needed to break even each month, let alone have a positive cash flow.

Rental property down payment needed in Silicon Valley

Some consumers believe that a 20% rental property down payment would do the trick to get them started as a real estate investor since that’s the most common amount for owner occupied homes.

While 20% down may work in some places. In most of the U.S.  you’ll need 30% down to be “cash flow neutral”, meaning that you aren’t losing money each month.  In pricey Silicon Valley, though, often it takes more than a 40% down payment on an investment property just to break even.

A few years back, a friend and past client asked me exactly this question. At that time I did the math and it looked like she would need to put more than 52% down just to have a neutral cash flow. Today I’ve updated it.

Depending on where and what you buy for the $1 million budget ,I suspect that the amount of rent collected each month would probably run between $3,000 and $4,000.

Side note:  with a condo or townhouse,  insurance coverage is probably going to be a lot less costly than with a single family home.  The estimates below are for a townhome.

 

Monthly condo costs - estimate

 

If my calculations are correct, you really need to put more than 50% down to buy this particular Santa Clara County townhome and have it support itself.

Is that a good deal?  Not really. At least not if your main focus is cash flow.

There are other places in the country where you can put a lot less down and break even or have a positive cash flow.

Of course, cash flow is one motivator.  Another, though, is appreciation.  Depending on your own goals, you may be far more interested in appreciation than cash flow.  If that’s the case,  Silicon Valley may be exactly what  you’re looking for as an investment buyer.  Those places where the down payment can be smaller may not have the same upside potential with appreciation as we have here in the San Jose area, or the San Francisco Bay Area as a whole.

Interested in becoming a real estate investor? Have a good down payment saved?  Please call or email me and we can chat.  If Silicon Valley isn’t the right place for you to make your real estate investment, I can introduce you to wonderful Realtors in other areas where the numbers may be more favorable.

 

See also: Buy a Los Gatos home or real estate investment property

 

 

 

How will the rising interest rates impact housing affordability?

Interest rates and affordabilityThe rising interest rates are impacting most home buyers’ ability to afford the type of house or condo they expected to be able to purchase just a few months ago. The Fed wants to curb all spending, including home buying, and it seems to be working – rising interest rates are having a dampening effect on real estate sales.

Rising interest rates – hypothetical condo buyer

Let’s say a home buyer needs a mortgage of $800,000 to purchase the desired condominium or townhouse, and that said buyer has good credit and 20% down and is seeking a 30 year fixed rate loan.  Interest rates may vary from one lender to another, but as of right now, a 5% to about 5.5% is fairly typical, but some online lenders are advertising 4% and 6% or 6.5% rates may be just around the corner.

$800,000   for 30 year fixed rate with 20% down at 4% interest – monthly principal & interest payment is $3819.32

$800,000   for 30 year fixed rate with 20% down at 5% interest – payment is $4294.57 (12% more than at 4 %)

$800,000   for 30 year fixed rate with 20% down at 6% interest – payment is $4796.40 (26% more than the cost at 4%)

Today I created a data table showing the payments for principle & interest with ascending rates. I took it as high as 16.50%, which was under the highest average rate in 1981, when some consumers paid more than 18% interest rate on their mortgages. (I remember my mom, a Realtor – Pat Pope – talking about those 18% rates at that time. As I recall, it spurred some sellers into carrying back notes just to get their homes sold.)  When Jim and I bought our first house in 1989, our rate was 10.25% after we bought down the rate by paying 2 points. Hence my strong preference for fixed rate mortgages in recent years, when the concern was the risk of rising rates.

 

Rising interest rates - payments on 800k mortgage P and I only

 

What impact will a rising interest rate have on qualifying for the mortgage?

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Does your HOA have enough in reserves?

How is the HOA’s reserve account? Does your HOA have enough in reserves so that you don’t have to worry too much about getting a special assessment?

When you live in or want to buy a  condominium, townhouse, or other common interest development with Home Owner Association (HOA) dues, it’s important to double check the financial health of the community. If the account balances are not sufficiently funded, the risk is higher of negative consequences down the road.

HOA reserve account - does your HOA have enough in reserves Graphic with apartments, clock, money, and text

Operating account and reserve account

HOAs have two types of financial accounts: one is for operating expenses (paying the gardeners, keeping up the complex, ongoing pest control work, etc.) and the other is the reserve account. The reserve account is a long term savings plan for major future repairs, replacement, or necessary upgrades. (more…)