As I write in July 2023, we are seeing a low supply or low inventory of homes listed for sale in most markets around the country. Currently one third of all home purchases involve bids above the asking price. Homes are being sold quickly with an average of just 18 days on the market. One reason why is so many owners have super low rates they wish to keep, forcing low supply of homes for sale. Some 70% of owners have a mortgage rate at or below 4%. This data is from the Federal Housing Finance Authority or FHFA.

With my clients and Realtors I work with I’m seeing this play out in multiple offer situations for homes in good condition. One of my clients lost out on two properties before finally seeing their offer accepted but it was for a considerable amount over the asking price.

In this post I would like to present strategies that may be helpful given the housing environment of low inventory we see today is likely to continue for an extended period of time. In addition, we still have much higher mortgage rates than just 2 years ago.

 

·       Use a Renovation mortgage on a less than appealing property but in your preferred location. This is perhaps the best strategy because it offers the chance to have a home renovated exactly as you would like it and the mortgage process will use the home’s after renovated value for loan approval. You realize the boost in value based on your improvements and enjoy the improvements from the start.

You can make the improvements after closing using one 30 year term loan and one payment. Even if you have no construction experience the process is designed to allow anyone with a desire to do so to finance a renovation at the same time as purchasing the property.

Typically, a property that is outdated, unappealing or even damaged will not attract multiple bidders and may be able to be secured under list price. An example would be an estate sale home where the heirs have emptied the property and seek to have a quick sale to access the cash. Heirs generally will not spend money to improve the property or even make it presentable. Such sales are usually called As Is sales. A perfect situation to buy with a renovation loan and perhaps not offer over or even at list price unlike a home in pristine condition.

Renovation loans can be done with low down payment FHA 203k, Conventional renovation loans, VA renovation loans for veterans and Jumbo renovation loans for high loan amounts beyond conventional or FHA limits. This blog has many stories of how all renovation loans available can be helpful if you look.

 

·       A Temporary Rate Buydown is another strategy gaining popularity. In 2023 as we see mortgage rates much higher than were available just 2 or 3 years ago. The current rates may tempt buyers to wait out the market and hope for lower rates in the future. But with the low inventory challenge inducing buyers to bid over asking price for homes, its likely home prices will not be dropping anytime soon. The law of supply and demand has not been repealed as far as I know.

A Buydown can be for 1 year, 2 years or 3 years. The mortgage rate, whatever it might be today is bought down lower, typically using funds from a Seller credit for buyers closing costs, for this period of time. Then after that time the rate and monthly payment increase to what they were without the buydown. A buyer will still have to qualify at the original rate but for the first 12, 24 or 36 months will make a reduced payment because the buydown funds augment the borrower monthly payment contribution and the full rate payment is made anyway.

The buydown funds remain in an escrow account until exhausted or if the owner should sell the property or refinance the mortgage to a lower rate, any leftover buydown funds will be used to lower the total mortgage amount refinanced or paid off. In this way the buyer always benefits and buydown funds are never unused. I wrote a detailed example in a previous blog called 2-1 Temporary Buydown Lowers a Mortgage Rate for First 2 years.

 

·       Becoming an Unexpected landlord is a strategy if you are a move up or move down buyer who has a super low mortgage rate not wishing to lose it. I have clients who purchased their first home a couple years ago with a super low mortgage rate. Now their family has grown, they require more space and seek a bigger house. But they, along with many others, do not want to sell the house due to a historic low mortgage rate they cannot come close to today. It is this situation which is part of the reason for low inventory of homes for sale. Owners just do not want to give up the super low rate mortgages they have so homes are not coming on the market as in the past when an owner wants to up-size or down-size. This is the main reason why inventory is low now.

A solution I suggested is they retain the current house and its low rate mortgage, lease it to tenants, who will over time pay off the mortgage for them and buy the next house with a low down payment 3.5% FHA or 5% down Conventional loan. The potential rent and the total current low rate payment are such they will have positive cash flow each month. While its true they cannot access the equity to make a large down payment on the next house when retaining the old one, they can buy a new house with a low down payment. The down payment doesn’t have to be 20% as many people believe. Also, the rent can be used from the departure house on a Conventional mortgage guaranteed by Freddie Mac at 75% of gross as extra income to qualify for the next house. The client understands today’s rates are much higher as they purchase the next house but the positive cash flow from the old house will help compensate for that. In this way they become unexpected landlords.

I myself have a super low rate from 2021 on my house that I will never give up. It doesn’t make financial sense over a long period of time to sell the house and lose that super low rate, at least for me. Instead, when ready to move on I will lease my house to tenants with positive cash flow given typical rents and buy the next house with a lower down payment. I can leave my equity in the current house for future use one day while the tenants pay off my mortgage. I view any increase in value over time, as well as any potential Federal income tax benefits of owning rental property, as a bonus. It’s the super low rate that drives my decision to not sell. I believe that makes me part of the low inventory problem, but I can’t help myself ??

 

·       Buy now and Refinance later when rates are lower is another strategy. With the situation of low inventory for sale, due in large part to owners not wishing to lose their super low mortgage rates, we don’t expect to see prices dropping in most markets.

Then it becomes a question of whether to buy now and later, when rates are lower in the future, refinance the mortgage to a lower rate to reduce monthly costs. Meaning that if home prices, due to persistently low inventory, appreciate even only 2% or 3% a year in most markets, isn’t it better to purchase the home now and benefit from appreciation than staying out of the market today and returning to buy when rates are lower but prices higher ?  The thought being that there is a cost to waiting for lower rates. The cost is likely higher prices in a year or two given the low inventory problem is not likely to be resolved anytime soon. The truth would be in the numbers of what the higher rate and payment is today, how long you end up paying it before refinancing to a lower rate, and the appreciation of the property you realize by purchasing now.

Generally speaking, if house prices appreciate at 2% or 3% a year for the next year and in that time mortgage rates drop somewhat, it’s likely the cost of waiting is higher than buying now given the appreciation is on the home’s value. The higher cost of a payment today versus a lower cost payment when rates drop may be less than the total value of the appreciation on the home at 2% or 3% over the next year. So, it’s a wealth building strategy to buy now and refinance later if 12 months of appreciation is greater than 12 months of the cost of a higher payment. Not to mention that over even 12 months the amount owed as principal on a mortgage will drop a little.

 

·       Seller Paid Closing Costs for Buyer is another strategy that can be helpful today. When offering on a property a buyer can always ask a Seller for cash due at closing day, based on the loan type and size of down payment, to pay buyer closing costs. This frees the buyer’s cash to go to all down payment. With this strategy a buyer may even secure funds to buy down the rate for all 30 years rather than just temporarily as in the Buydown example above. Of course, the buyer may have to entice the seller to provide such funds generally by offering a higher sale price.

In any FHA loan a buyer can ask for up to 6% of the purchase price back at closing day for all closing costs and pre-paid items. These can be title & escrow fees, government transfer taxes buyers may owe, lender costs, attorney fees, first year home insurance policy, pre-paid interest to end of month, or to buy the rate down lower for all 30 years.

In Conventional lending the Seller credit to a buyer is regulated by size of down payment. If a buyer has a 5% down payment, then Seller credit to closing costs is limited to 3% of sale price. If a buyer has a 10% down payment, then Seller credit for buyer closing costs can be 6% of sale price. If buyer has a 25% down payment, then Seller credit for buyer closing costs can be 9% of sale price.

The benefit I see in today’s low inventory and higher interest rate environment is that a buyer has their own funds to either raise the down payment if Seller is paying closing costs, which then lowers the monthly payment, or to use the funds to buydown the rate for all 30 years, which also lowers the monthly payment.

 You may even be able to combine several of these strategies on your purchase to maximize the benefits of each for your situation.