1,452. One Thousand, Four Hundred and Fifty Two.
That’s the total number of Active sale listings for Single Family Homes, under $250,000, on the Phoenix area Multiple Listing Service. Those are the homes that I would consider “Starter homes” or “First Time Buyer Homes”.
That is an alarmingly low number, making it very difficult for First Time Buyers, who are either voluntarily in the market, or involuntarily, since they can no longer afford renting, to buy a home. Especially a buyer who is going to need a seller contribution, or concession, to complete the transaction. Seller contributions can be the “make or break” of transactions for lower price point buyers. These are buyers who usually do not have a ton of money available to them for down payments and closing costs. On a purchase in the $225,000 range, I would expect a buyer’s closing costs (with down payment) to be between $13,000 and $18,000, depending on the loan program. It has been a traditional practice in the Phoenix market to ask the seller to contribute a percentage of the purchase price back to the Buyer as a gift, in order to cover some of those closing costs. With the shortage of inventory, and therefore increased competition for properties, it has become very difficult to find a Seller willing to give any such concessions.
When a Seller agrees to give a concession, that lowers their net. With inventory being as low as it is, there’s no reason a Seller should make such a sacrifice. To compound the problem, one of the traditional remedies to offset that lowered net is being taken away from Buyers. In a “normal” market, it would be easy to offer a purchase price above asking price to offset the concession requested. In other words, if the list price is $225,000, and the Buyer asks for $5,000 in concessions, the buyer would offer a purchase price of $230,00. This is sometimes called “building it into the loan”, but more on that later.
The problem we face now is that with the rapidly rising prices of homes, Appraisals, upon which all financing depends, are not coming in over list price. Why? Simple: Appraisers remember who got blamed for the housing crash of 2006-2008, and aren’t going to stick their necks out. So, we’re seeing appraisals come back with very conservative values. Values based on solid comparables, disregarding the market trends. IE: Appraisers are playing it safe. But, in the process, they’re taking away the Buyers who need concessions one tool to gain those concessions.
So, what’s the solution if you’re a Buyer who needs concessions? Well, here are some suggestions:
1) Plan WAY ahead. Start working with a lender well before you plan on buying. Like, a year or more. A good mortgage broker can give you invaluable advice on what you need to do to prepare to qualify for a loan, or improve the loan terms you might get. Start making a financial road map so you know how to get where you want to go.
2) Save. Save every penny you can. You’re going to need all the cash you can get. (Bonus: Friends and Family can “Gift” you money for your purchase. But it has to be a Gift, not a loan. So, start remembering your relative’s birthdays, you might need their help.)
3) Eliminate Debt. Your “Debt To Income” ration is one of the things a lender looks at. It’s simply how much of your monthly income goes to pay off debt (credit cards, car loans, etc). The lower that ration, the better you look to a lender. Also, the less debt you have to service, the more money you can save, faster.
4) Do whatever it takes to improve your credit score (this is where a mortgage broker can really help). Even if you have good credit now, better credit means lower interest, meaning more buying power. Better credit might even mean you qualify for a a Down Payment Assistance Program (DPA), which could gift you up to 3% of the purchase price to cover closing costs (Free Money!!!).
5) Be patient, but don’t over think. With inventory as low as it is, trying to buy a home is going to be frustrating and emotionally draining. You’re going to put in a lot of offers, and get rejected a bunch of times. It’s going to suck, but be patient, and keep your eye on the goal: home ownership. On the flip side, don’t over think your decision. You probably won’t have the luxury to be picky. If you have 5 “Wants” in a home, be willing to settle for 4, or even 3, of those. You can always make improvements to the home, or, after you’ve built equity in that home, move up to the home with 5/5.
Questions, Comments, or Concerns? Feel free to email me at Erin@HomeSellerErin.com
