Lots of real estate agents want to know what's the next thing that's on the horizon for real estate. The savvy agents want to jump on that bandwagon and ride the road to easy riches. This morning, thanks to inspiration provided by Broker Bryant's excellent blog, I would like to share my thoughts about the matter.
I look at the real estate market in Sacramento like an analyze-it-yourself medical chart. You know, the ones that say if you have a cough and a fever, you can diagnose that condition yourself. The option 1 arrow points to an increased consumption of liquids and plenty of bed rest. Or, option 2, ignore those symptoms and go out to party like there's no tomorrow. The illustration following option 1 shows a happy woman being hugged by her husband and kids. The illustration from the option 2 path might show a bare foot with a toe tag on it.
With that in mind, here's what I think will happen in real estate, not only in Sacramento but throughout the country. Eventually, interest rates will rise. That's pretty much a given. Qualifications are already much more stringent than they were a few years ago. When interest rates go up, a home buyer's purchasing power will go down. In flat markets like Sacramento, we probably won't see a lot of appreciation over the next few years.
So what will be hot? I'll tell you. Sellers who have assumable FHA loans. If you're taking out a conventional loan today to buy a home, you might not be able to sell your home down the road. First-time home buyers might not want the conventional or FHA rates offered a few years from now and may be unwilling to take out a new loan to pay off your existing loan. But they'll be drawn like a moth to the flame to those available loan assumptions. Why? Because those interest rates range from 4.5% to 5.5%. They are fixed-rate mortgages. And they are assumable.
If you're a homeowner who has an FHA loan with a low interest rate, you could be sitting on a gold mine.
I already have my plan in place. Down payments will need to be in the 7% to 8% range to do a cash-to-loan transaction. If there is equity leftover, sellers will need to offer owner financing. That means either carry a second mortgage, do an all-inclusive trust deed or a land contract. Those financing instruments are saleable to investors. The agent who has the source of funds to buy those financing instruments will have an edge in the marketplace.
See, I am not only a Sacramento real estate agent. I am also a veteran of real estate from the 1970s and 1980s, back when we used to create paper (a second trust deed) and use that as a down payment on another home. I understand how this type of financing works. I also realize that now agents could be deemed arrangers of credit and, as such, subject to all sorts of laws and regulations. I ask agents: are you guys ready for this? Are you ready to do business in year 2013?
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Certified HAFA Specialist
My Sacramento Real Estate Listings
Elizabeth Weintraub is an author, home buying columnist for The New York Times-owned About.com, a Land Park resident, and a Land Park real estate agent who specializes in older, classic homes in Land Park, Curtis Park, Midtown and East Sacramento. Weintraub is also a Sacramento Short Sale agent who lists and successfully sells short sales throughout the four-county Sacramento area. Call Elizabeth Weintraub at 916.233.6759. Put 35 years of real estate experience to work for you. Broker-Associate at Lyon Real Estate. DRE License # 00697006.
The Short Sale Savior, by Elizabeth Weintraub, available at Amazon.com.
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The views expressed herein are Weintraub's personal views and do not reflect the views of Lyon Real Estate.
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Elizabeth: I like your thoughts about the FHA loans. In fact, I need to have a conversation with a first time buyer who is about to purchase with a conventional loan. I'm thinking FHA is the better bet.
Elizabeth,
THANK YOU! You have made some tremendously valuable points for me to put into operation NOW...thank you so much for writing this post and sharing your experience... :)
Elizabeth ~ I love it when someone plays out the path and then takes action! This is an important message.... having sold real estate in the late 70's and the early 80's where interest rates were up to 21% the only way a seller could sell was with a 1st, 2nd and 3rd.. (an entire other post).. at that time there was NO qualifications for an FHA or VA loan and a buyer just put down the cash to loan difference and took over the loan. Today the buyer has to re-qualify but the rate stays the same. I clicked the star box above and
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Hi Chris Ann: I think there's little contest between FHA and conventional -- rates are too close. Well, unless the buyer is about to get an aced out by another offer and that buyer is conventional.
Hi Deborah: When I spotted 80 / 20 combos going away, I knew that FHA would become huge. It was the logical direction.
Hi Lori: Staying ahead of the pack is almost always wise. Agents sometimes ask me why I put all of my thoughts online because the thing is somebody else will read what I wrote, take credit for it, steal it and run with it. But I don't care. Just as long as they don't plagiarize.
Hi Carra: Oh, a twin separated at birth. I don't find too many people like you around today. Thanks for the feature!
Elizabeth - This is one of the best benefits of getting an FHA loan and like Deborah, most of my clients don't qualify for conventional except for my dpa clients and even they like getting FHA better than conventional.
Unlike some of you, I didn't do mortgages in the 70's & 80's. With only eight years in the mortgage business, I still have a lot to learn. However, I am always willing to learn a new way to do business and I figure as long as I keep an open mind about learning new things, then I should be ok because I want to do this for as long as I can.
Less than 1% of my sellers CAN have FHA loans. They are NOT owner occupants. But working in a resort area is different from selling residential real estate. As for 2013... There will always be people with LOTS of money who want a lake home... And I'll still know MY lake better than most. I have seen and expect to see more agencies go under in this area. Had a friend tell me last night that the company she works for has had 1 sale this year. I don't expect they will still have an office in 2013.
I think you are right on about FHA....and off subject, love your new picture...but what's with your Meez dancing with the penguin? I'm confused :)
Elizabeth
First let me say I love your new photo.
Thanks for a very well thought out post. It is the years of experience I have had that also give "perspective" on the current market. I am a "veteran" from the 80's and arranging "paper" for a Buyer was standard. However, we charged 1% extra, and no one complained.
I think you make a good point about FHA loans.
Elizabeth,
Traditional real estate services will always be needed, there will be lots of internet models and many will come and go. If you are in a rebate state, I could see a lot of pressure to lower fees and or rebate buyer side fees.
If you keep your skills sharp and stay ahead of the curve, you will be fine. If you are a slacker you will probably be gone?
Assumable loans are tricky, but you're right. They can be an advantage. I think that some of the seller carry-backs of the past has the lenders take pause, and realize they would do the same thing, and then the 80/20, or 80/15/5's were born. But, when interest rates rise, and I would hope they don't for a good long while, everything will come full circle again, and seller carry-backs will be common, as well as assumable loans. (Like the new pic!)
Elizabeth ... that is a great analization of your medical chart! pippa
Wow, terrific post. I love how you make a strong assertion and back it up with experience. Will be following this closely to see how it plays out.
Right on, Elizabeth. I see 2013 as close to the beginning of selling with an assumable loan. So, I expect the number will be low at the start, but will gradually increase as more people who buy now with a low interest FHA loan put their homes up for sale.
I held paper in the 70's and 80's with deferred payments and balloons. I was able to get top dollar in Houston when nothing was selling. I hate to see rates go up for the profession but there are too many fence sitters in our area. Personally, I want to see them substanitially go up because of my own investment...I know that is terrible...sorry.
Great post. Thinking ahead with experience behind you is a win win for the future.
GREAT NEW PHOTO!!! I didn't recognize you for a second.
If we are not thinking about what can be or what will be, we are going to be out of business. This industry equals change, like it or not.
I strongly agree with your assessment for assumable loans. It's something I have been telling my buyers for the last couple of years (since FHA loans became an option when they increased the loan limits in Contra Costa County)
Elizabeth, great point. Good information for a customer to consider.
And here I thought that FHA was just another one of those awful governmental interventions into our otherwise magical market mechanism.
Elizabeth.....back in the '70's we did alot of VA assumables.....banks gave second mortgages if the buyer did not have enough cash in hand.....we had banks that would give the entire difference in a second mortgage.....or course, that was then and this is now.....I'm sure in the year 2013, financing will have an entirely new look.
I really love your new hair style. You look like a new women! I truly believe traditional real estate will always be around. This is wonderful information for the consumer to read. I feel FHA is a better bet.
FHA is a much better loan for first time buyers, especially if their credit scores are below 700. We are going to have to be even more creative here in the near future to keep all our doors open...I am looking forward to the challenge!!!
Hey - You are so on it. In GA were using about 55% FHA from what I hear and these will be looking very good down the road.. I think that a condo/thownhouse buyer should only use FHA as they'll never be able to sell otherwise. Just sell with no money down and be ready to walk from the 3.5% downpayment as the alternative is worse.
Bottom line is a 4-5's % loan that's fixed will be a huge advantage on the other end and wil lbe a great low payment until then.
I started in the 198s when the NENQ's were beginning to go away. (Non_Escalating-No-Qualifying) FHA loans were sign-and-drive, even for investors!
This is great information. Thank you for allowing the re-blog.
Very informative! thanks
Ah, the old AITD (All Inclusive Trust Deed) Would that the real estate industry in Michigan had ever heard of one. What a great way to make money in real estate. Here in Michigan they just call them a "wrap around mortgage." No fancy acronym. I once wanted to do one recently and asked a loan rep at my bank about it. He said he'd never heard of such a thing. If I remember correctly, the reason the AITD fell from favor back in the early 80's was because title insurance companies wouldn't insure them. Do you know if this is still the case?
Carl S
I bought my first home when I was 25 with a VA loan (long time ago) that was also assumable, but I chose not to when a buyer inquired as I would then lose my VA eligibility. I don't know if the same holds true for FHA loans.
Elizabeth- I did not even read your post because I saw your new profile photo and just had to tell you that it looks great! Katerina
Elizabeth- I remember doing these assumables back in the early 80's when interest rates were through the roof and no one could qualify. We also did wrap arounds, which the banks changed that and added due on sale clauses. It is my understanding that FHA assumables are assumables WITH qualifying. The other issue is that the seller is still on the hook, assumable does not relieve them of their financial obligation. Maybe something has changed. Katerina
Great post, you have the years experience now just keep up with the programs and training. Thanks for the information.
I never knew the real estate market before all hell broke loose (about 5 years ago), so anything that happens next is new to me. Bring it on!
Good creative thinking Elizabeth. My first home purchase was back in 1990 in San Francisco right after the S&L crisis. We did a wrap around loan to purchase that little one bedroom condo. I think we're going to have to go back to some creative financing options in the future as well. Most agents have not dealt with these type of transactions. Those who have done them have a leg up. Great post and best of luck to you.
I keep telling my buyer clients about their assumable FHA loans and how attractive they'll be down the road!
Elizabeth - an interesting point and very probable. With your wealth of knowledge and experience, I'm sure your 'right on the money'...good post!
GREAT BLOG,INTERESTING RESPONSES. OFF THE SUBJECT. WHARE DO YOU FIND GOOD ARTISTIC PICS LIKE THE ONE IN THIS BLOG?
This is one of the many plans that we need to consider as the market moves--so that we are not left behind.
Elizabeth - I've foreseen a little of that "assumable loan" vision too! It could be the 1980s all over again! In the era of the early 1980s, the interest rate shot to 18%.
The only homes that could be sold were generally homes with mortgages originated in the 1970s. These homes had interest rates running from 7% to 10%, and low equity. That way, a buyer with a little down, could assume the existing low interest rate loan. When I first got into this business in 1981, I would sit down every Saturday morning, when the new MLS books came out, and take a yellow high-lighter and circle the one in ten homes on the market with that kind of financing availabe. All other sellers had a really hard go of it!
That's interesting. I see your point. Makes you look at FHA loans now differently.
We had a seminar a year ago about creative financing and this was one of the topics introduced. I think I will make an effort to study up on this and appreciate the heads up! Thanks Elizabeth!
Elizabeth, very cleverly written.
Elizabeth, great post! We have been doing MOSTLY FHA loans... As long as values remain, we should be ok!
I know I need to go get the new mortgage license and this is a good reminder that though I don't need one right now as I'm not doing financing, I need to go get it.
Seller financing, assumable loans and lease purchase will be the wave of the future. Totally agree with you Elizabeth. Thanks for the post
I think FHA loans will be an attractive means for buyers to get into a house down the road - I remember my mother was able to assume a mortgage back in the 1980's at a much lower rate than the market - it is a win win for both buyer and seller.
Laurie
You brought some memories of the Carter years.. .when I first arrived to the US. . interest rates were 17% to buy a home. . yikes!
Great points! Another reason we love FHA!
Great post. We have noticed a dramatic increase in FHA loans in our area. Your points about assumable FHA loans are good ones.
I love the fact that FHA loans may be golden...that's more than half my customer base so i'm thrilled.
We are already seeing many buyers ask for seller financing...
Nice pic, Elizabeth! Looks really snazzy!!! On another note, I began my real estate career inl ate 2006 at the beginning of the decline and I haven't worked much with any buyers actually assuming an FHA mortgage. Although I am aware that these mortgages are assumable, like Katerina, I was under the impression that the owner is still not released from liability on these mortgages. Is this not the case? Given the current economic conditions, I find it hard to believe that a seller would agree to sell a home through a mortgage assumption and knowingly be willing to assume liability for the mortgage. I could be incorrect, though.
Oh, man, holy cow -- I cannot respond to each person who was so kind as to leave a comment on my blog. But a couple of you asked about a loan assumption and a release of liability. It is easy to confuse a subject-to with an assumption as people sometimes in error use those terms interchangeably.
The basic difference between taking over a loan in a subject-to transaction and assuming a loan is that the lender releases the seller from liability in an FHA loan assumption, and the buyer assumes that liability. That's a reason that many buyers prefer to do a subject-to because they don't want the liability.
Decades ago, FHA loans did not need to be assumed. For FHA loans originating before December of 1989, a buyer could just take over an FHA loan and start making the payments, leaving the seller on the hook. Not true anymore. Subject-to transactions aren't very popular because of alienation clauses that give lenders the right to accelerate. Of course, in this day and age, I ask you: what lender really wants to foreclose if it's receiving payments?
Some really interesting predictions Elizabeth. I think you may be on the mark with quite a few of them. I will stay tuned and keep your blog in mind as it all plays out. Thanks!