Buyers are paying to bridge the appraisal gap

Remember the good old days, when single-family home buyers would offer appraisal gap coverage to make sure they were making the best offer? Now, they’re including it just to get noticed, according to multiple agents from brokerages across the country.

Single-family home sellers are regularly getting multiple — and sometimes dozens — of offers in markets nationwide, and transactions are closing at record speeds. In some places, buyers are being given 15 minutes to walk through, if they get inside the home at all, and often less than 24 hours to write and submit a competitive offer. 

And “competitive” in today’s low-inventory, high-demand market has taken on a whole new meaning, with homes regularly selling for thousands over list price, and buyers who need to secure financing going up against all-cash investors. With all this money flying around, sellers are accepting sky-high offers from overeager buyers who find they’re at risk of falling into the appraisal gap.

What is the appraisal gap?

Writing coverage of the appraisal gap — the difference between the offer and the appraised amount the bank will lend on — into a sales contract isn’t a new negotiation tactic for a hot market like the one we’re in. But agents across the country report it’s become increasingly common in the last several months.

“I make sure my buyers [really understand that] it’s going to turn into a bloodbath,” said Alison Malkin, who’s head broker and owner of RE/MAX Essentia and is licensed in Connecticut, Massachusetts and Florida. “I ask them up front if they have to buy right now, because it’s going to be an arduous process. You’re going to be frustrated, and you’re going to spend 20% more than you wanted to.”

Malkin recently listed one client’s home for $210,000 and was immediately bombarded with 22 offers, topping out at $280,000. Her sellers chose one at $239,000, and the lucky buyers had to come up with an “extra” $29,000 to cover the appraisal gap. 

Creative, yet risky, ventures

Here’s where buyers need an agent who knows the area, the market and how to get creative: For another recently closed sale, Malkin’s buyer clients found a particular home that fit their specific and urgent needs, so Malkin reached out to the seller’s agent, who she’d worked with for many years, and found out what the sellers had to have. In this case, the home needed some work, and Malkin’s buyers were willing to do the manual labor before signing a sales contract — essentially improving someone else’s property with no solid promise the deal would go through (it did).  

Preparing buyers to come immediately with their highest-and-best offer and be ready to back up their offer with actual cash (or sweat equity, as it were) is essential right now, Malkin said. As is making sure buyers understand that appraisal gap cash is essentially gone. She said she’s been asked several times by buyers when they can expect equity gains in their purchased home to make up the difference in what they paid the sellers. “I tell them no one knows, and they need to decide if getting this house is worth it to them.” 

Eli Tene, managing director of CENTURY 21 Peak Corporate Network in Woodland Hills, Calif., agrees with Malkin that agents need to make sure their buyer clients know exactly what they’re signing up to pay for, and are only offering what they can truly afford.

“Appraisals aren’t an exact science, and they’re not always fast enough to catch up with the market value … the price someone is willing to pay for a property,” Tene said. “The appraisal process can’t calculate the emotional value of homeownership, nor the current appreciation in value.”

Tene is referring to the appraisal gap that occurs when home values increase faster than the comps can keep up, which is another issue that’s complicating transactions for both buyers and sellers. Malkin said appraisal values, and therefore comparable sales, in her area are “catching up” to market values, but “buyers keep offering even higher than that,” which will likely continue while demand outpaces inventory at such remarkable rates.

Buyers right now have a few options in the Denver, Colo.-area, market, said Angelica Olmsted, an agent with RE/MAX Professionals Cherry Creek: They can come with cash and bid (appropriately) high, look at “less-desirable” properties — condos with no outdoor space, for example — or look at new builds. Olmsted said the Denver-area buyers’ market is especially cutthroat for single-family homes listed at $650,000 and below, and says she’s consistently telling her clients to be ready to pay 10 to 15% more than list price, and to have that cash on hand to cover the appraisal gap.

Pick up the phone

“What buyers’ agents need to be doing right now is picking up the phone and calling sellers’ agents instead of just relying on comps,” Olmsted said. “Appraisal gaps can be confusing. I have clients repeat back to me exactly what they’re agreeing to do to make sure they understand.”

Managing buyer expectations, researching the most recent area comps and helping clients “be 75 to 80% sure” they want a house before they even walk through the door is how Laura D’Ardenne, broker/co-owner of RE/MAX of Cherry Creek in Denver is keeping her buyers’ best interests in mind while meeting them where they’re at.

“It really depends on the type of buyer and where they’re coming from,” D’Ardenne said. “Have they been saving for years and years and this is really cutting into their budget? Or, are they recent sellers taking advantage of a large gain? I don’t make any assumptions about the financial position a client is in, and just give them up front the reality of the market.” 

And the reality is that some buyers are going extreme routes to get the money they need to outbid the hordes of other buyers and cover a sometimes-gaping appraisal gap.

“I don’t want my clients to be overpaying,” D’Ardenne said. “But that’s where we are.” 

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Housing market inventory is starting to recover

"In nearly every market, 20% more inventory means 20% more home sales," said Lawrence Yun, chief economist for NAR

Housing starts jumped in March, recovering from a bleak February that included wild winter storms in the South, according to a recent report from the Census Bureau. Single-family housing starts rose 15.3% over the month to a pace of 1.24 million annualized units. That’s up 37% from a year ago, but it’s important to take into account that the COVID-19 virus first took hold of the housing market in March 2020, said Doug Duncan, chief economist at Fannie Mae.

“The March pace was the second strongest since 2006, surpassed only by this past December’s reading,” Duncan said. “An extremely tight supply of existing homes for sale combined with still-favorable mortgage rates and an improving labor market will continue to support demand for new housing. Suburban multifamily housing construction is also benefitting from this trend.”

For now, Duncan said, the supply of existing homes for sale and an elevated level of new homes sold — but not yet constructed — should help bolster a strong construction pace of new housing starts moving into the spring buying season.

“While housing demand is expected to remain strong, we expect it to diminish somewhat as the year progresses due to the waning effect of the COVID-19 disruption to homebuyers’ purchasing timelines,” Duncan said.

Single-family housing starts ended 2020 on a high note, reaching a 1.338 million-unit pace in December — the highest pace since 2006. While the pace has certainly dropped since then, there are signs that builders could have some work in the pipelines.

A positive indicator for the housing market is the overall number of permits issued for single-family homes, which increased 4.6% from February. That number is a good indicator of future construction, according to First American Deputy Chief Economist Odeta Kushi.

“Builders are facing surging demand in an environment of limited existing homes available for sale,” Kushi said. “Yet they face challenges, including limited building materials, rising lumbers costs, a dearth of buildable lots and costly regulations. These headwinds could slow the momentum.”

A recent report showed the current price of lumber and building materials is adding approximately $24,000 to the cost of new builds, forcing prospective homebuyers to abandon new builds and focus on existing properties. That’s depleting inventory across the country.

“There continues to be a demographic-fueled shift away from renting to home-owning driven by millennials aging into homeownership, but the challenge is the historic lack of supply,” Kushi said.

Added Matthew Speakman, Zillow chief economist: “There is no avoiding the fact that prices of key materials are rising at their fastest rates in decades, and availability is often limited due to pandemic-driven supply chain disruptions. The question now is whether this enduring optimism can continue to translate into activity, and if a continuation of these conditions will eventually force builders to throttle back.”

Privately-owned housing starts in March were at a seasonally adjusted annual rate of 1,739,000, up 19.4%
from February’s estimate of 1,457,000.

Single-family housing completions in March were at a rate of 1,099,000, up 5.3% from February’s rate of 1,044,000. Single-family authorizations in March were at a rate of 1,199,000, up 4.6% from February’s rate of 1,146,000.

“In nearly every market, 20% more inventory means 20% more home sales,” said Lawrence Yun, chief economist for the National Association of Realtors. “Today’s news on the new home construction surge is, therefore, highly welcomed, especially in light of major challenges on material costs and soaring lumber prices.”

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The Most Common Springtime Plumbing Issues

Spring brings warm weather, sunshine and an abundance of flowers, but it also brings about a few unique plumbing problems.

While spring showers help your flowers and other plants to grow, rain can also cause plumbing issues. As the weather warms up, be on the lookout for these four springtime plumbing problems. Catching them early can save you a lot of headaches!

Leaky Plumbing

Cold winter temperatures can cause pipes to contract or freeze, which can cause tiny cracks. As the weather warms up, pipes begin to expand, causing any tiny cracks to also expand. Old pipes and outdoor plumbing are vulnerable to developing such cracks.

If you notice dripping pipes, standing water, a musty odor or a mysterious increase on your water bill, you could have leaky plumbing. Any leaking pipes must be fixed right away to prevent water damage and mold growth.

Low Water Pressure

Poor water pressure can be caused by a plumbing leak somewhere in your home. These can be hard to find, so you may need to contact a plumber to find them and fix them. It could be somewhere inside, or it could be leaking from the outside pipes that lead into the house.

Spring rainstorms can also cause low water pressure. Because rainwater is heavy and drenches the soil, that weight can put stress on your underground pipes, causing leaks which can lead to low water pressure inside your home.

Slow Draining Sinks and Backed Up Pipes

Just as spring rains can put pressure on your incoming outdoor pipes, the same is true for the pipes leading out towards the sewer. If heavy, rain-soaked soil puts too much pressure on an old or weak sewer pipe, it can result in backed-up sinks and toilets, as well as sewer water flooding your yard. The warmer weather also spurs plant growth, and tree roots can grow through a small crack in a drain line, causing a blockage. In either case, backed up pipes are a serious problem that need immediate attention from your local plumber.

Sump Pump Failure

Basement sump pumps typically don't run during the winter, because it's frozen outside in much of the country. However, once the weather warms up and spring rains flood your basement, you’ll need a working sump pump to clear water from this area. Early in the spring, have your sump pump checked to make sure it's working properly. That way, you can easily avoid a flooded basement.

Spring is just around the corner and now is the time to make sure your plumbing survived the winter and will give you consistent support through the warmer months to come!

Thanks to our partners at Housecall for this info.

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Retired and house hunting? How to finance your next home purchase

Retirees who are considering a move that involves buying a home may want to consider how they’d finance the purchase.

It can be tricky for seniors to get a mortgage in retirement, said Al Bingham, a mortgage loan officer with Momentum Loans in Sandy, Utah. Not only are lenders still more cautious about extending credit during the pandemic, retirees generally have left a steady paycheck behind.

“You can have a lot of money but show very little income and have difficulty qualifying for a mortgage,” Bingham said. “It frustrates a lot of them.”

And although interest rates are still very low, they’ve been creeping upward. The average interest rate on a 30-year mortgage is about 3.25%, while for a 15-year fixed-rate mortgage, it’s about 2.5%, according to Bankrate.

Combined with surging home prices and limited inventory, the situation may be even more challenging for retirees, Bingham said. This means it can be worth doing some strategizing and planning ahead.

Of course, the typical aspects of qualifying for a mortgage — such as having a good credit score and monthly debt that isn’t too high — would apply, as well.

The specifics will depend on the lender and the type of mortgage you’re seeking. Loans that are backed by Fannie Mae and Freddie Mac come with requirements that lenders must adhere to, while private mortgage lenders may have their own set of standards.

Qualifying based on income

The most common way for retirees to get a mortgage is by qualifying based on income, said certified financial planner Daniel Graff, a principal and client advisor at Sullivan, Bruyette, Speros & Blayney in McLean, Virginia.

Lenders generally will look at your last two years’ worth of tax returns to see what that amount is. It may include, for instance, Social Security, pension income, dividends and interest.

However, your taxable income may not be enough to qualify for the loan on its own. That’s where a retirement account like a 401(k) plan or individual retirement account can come into play.

You can have a lot of money but show very little income and have difficulty qualifying for a mortgage.

Al Bingham

MORTGAGE LOAN OFFICER WITH MOMENTUM LOANS

The idea is that you take distributions to help you qualify for the mortgage, even if you don’t really need the money. As long as you’re at least age 59½, you can tap your IRA or 401(k) plan without paying a 10% early-withdrawal penalty.

And, under rollover rules applying to retirement accounts, you can put the cash back within 60 days without the distributions being taxable. Beyond that time frame, however, the withdrawals would be locked in and you’d owe income taxes on the money.

Meanwhile, the lender would see the income on your bank statements, where the money came from and when it hit your account.

Graff said he helped with two mortgages for clients last year that involved taking distributions from an IRA for two months so they could qualify and then returning it under the 60-day rollover rule.

However, he said: “My mortgage lenders are telling me that they are getting a bit more strict on the historical verification, which may restrict this opportunity in the future.”

In addition to seeing verification of the required income, lenders will want to be sure that the distributions can continue for at least three more years, Graff said. 

Alternatively, you could potentially qualify for a mortgage based on your assets in a brokerage account or IRA. Essentially, the lender applies a formula to the money in your account — generally using 70% of the value of the account — to determine whether it could stretch long enough to cover mortgage payments for the life of the loan.

“In this scenario, the underwriter is not looking directly for a taxable transfer from an IRA to a bank, but a statement of assets that allows [the lender] to be comfortable that a certain amount could be withdrawn each month,” Graff said.

Non-mortgage loans

There are a couple of alternatives that are similar to each other but have subtle differences.

The first option is to take a so-called margin loan on your brokerage account to help fund your down payment or part of the purchase. Basically, brokerage firms may lend you money against the value of your portfolio — called borrowing on margin — whether you use the money to purchase securities or something entirely unrelated to investing.

While such loans come with risk of a “margin call” — you could be asked to add money to your brokerage account if the value falls below a certain amount — the interest rates on margin loans are generally more favorable than those for mortgages or other types of borrowed money.

“Right now we’re seeing some rates at 1.75%,” Graff said.

Additionally, while it would be important to limit the loan so you face less risk of a margin call, it’s a way to avoid selling assets in the account — and paying taxes on gains — if that would have been the alternative. And, the loan can remain in place until you pay it off (as opposed to having a set time limit).

“What I’m seeing is a combination of margin loans and traditional financing,” Graff said.

The other option is to “pledge assets.” This also involves taking a loan against your brokerage account, and the assets are used as collateral. Yet unlike margin loans, you cannot use the money to purchase securities. There also is a set duration for these loans.

For instance, at Schwab, you may be able to borrow up to 70% of the value of eligible assets pledged as collateral. The longest term for such a loan is five years.

“You could almost use that loan as bridge financing and plan more carefully how to prove income to the bank,” Graff said.

It’s worth noting that the interest paid on these loans can often be deductible against portfolio income (interest and dividends).

“It’s not deductible on Schedule A like a traditional mortgage, but in many situations the tax benefits can be similar,” Graff said.

He added, however, you should consult with a tax advisor to fully understand your options.

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Here it is: Biden’s first-time homebuyer tax credit legislation

It's a grant, not a tax credit, and conditions limit how many people would qualify

Consumers have been closely following President Joe Biden’s proposed first-time homebuyer tax credit, but the newest form of that proposal has several significant restrictions. The latest draft of a down-payment assistance bill would provide $25,000 to first-time homebuyers, but only those who are also first-generation homebuyers and economically disadvantaged. Plus Biden’s proposal is not actually a homebuyer tax credit, but it is money that would be available at closing.

On Wednesday, lawmakers published a draft version of the legislation, the “Downpayment Toward Equity Act of 2021,” ahead of a hearing held by the U.S. House Committee on Financial Services, which Rep. Maxine Waters chairs. During the hearing, lawmakers discussed a number of housing measures on the table in President Biden’s infrastructure package, including funding to shore up public housing.

The proposed down payment assistance would be means-tested based on income, and limited to those who have not owned a house for at least three years. To qualify, neither of the borrower’s parents may have owned a home. That qualification doesn’t apply if the borrowers’ parents lost their home in a foreclosure or short sale, or if the borrower has ever been in foster care, however.

Borrowers who make no more than 120% of the area median income where they live — or if they live in a high-cost area, 180% — would qualify for a baseline of $20,000. Those recognized as socially disadvantaged, because they are in a group that has been “subjected to racial or ethnic prejudice,” could receive an additional $5,000.

The grant funding — which is not a tax credit — could be used at closing toward a downpayment on a residential property with one to four units, including a condominium, cooperative project or manufactured housing unit.

The program, which is currently being discussed in the House of Representatives, would dole out funds to states based on population, median area home prices and racial disparities in homeownership rates.

State finance agencies would be tasked with administering the program and distributing the funds. But they could delegate that responsibility to community-based nonprofit entities, such as community development financial institutions, minority depository institutions, housing counseling agencies or community development credit unions.

The bill would not require that states contract with such groups, however. Last year’s Paycheck Protection Program drew heat for its over-reliance on large financial institutions to disburse loans, instead of community-based financial institutions, which are used more often by minority-owned businesses.

This would not be the first time the federal government has given first-time homebuyers a boost. A Bush-era program, the first-time homebuyer tax credit, allowed borrowers to claim a credit on their income taxes. The Obama administration continued the program until 2010.

President Biden first intimated he was considering such a benefit while he was on the campaign trail. Unlike the Bush and Obama-era programs, however, under the draft legislation, borrowers would receive down payment assistance upfront.

In order for such a bill to pass, it would have to clear significant hurdles in both houses of Congress. If it were included in a larger infrastructure bill, that process would be slightly abbreviated. Political sources say the draft version is a starting point for discussion.

The bill seeks to narrow the homeownership gap by targeting first-generation homeowners. Multigenerational homeownership is a “quintessential component of why and how people become homeowners,” said David Dworkin, president of the National Housing Council, and a third-generation homeowner.

Those who do not have family members to guide them through applying for a mortgage are less likely to submit themselves to a process that is “rife with fear and dread,” he said.

But the benefits of multi-generational homeownership can also be more material.

“I got the daddy down-payment loan. My dad was proud to give it to me,” Dworkin said.

Another concern is the impact a downpayment assistance program could have on the housing market, which has already seen a surge in home price appreciation. Any help to first-generation, first-time homebuyers could further raise prices, potentially complicating the mission of the legislation.

The targeting of the bill — layered on top of the income means-testing component — would also greatly reduce the share of borrowers eligible for the assistance, said David Stevens, the former president of the Mortgage Bankers’ Association.

“It would be a very small market,” said Stevens. “No legislation is perfect.”

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