Thursday, June 24, 2010

Low Interest Rates - a Gift for Buyers?

Mortgage interest rates are the lowest they have been since the 1950s. One only needs to open up a newspaper to see the barrage of articles discussing interest rates. The reasons behind the dip are many, but the predominant reason is the action the Federal Reserve (The Fed) has taken to drop key interest rates across the board.

The Fed acts as a quiet guardian, monitoring even the most minor fluctuations in the economy. By adjusting the Federal funds rate, or the interest rate which banks charge each other, the Fed can adjust rates affecting everyone in the nation. The Fed increases interest rates to make borrowing less alluring and thus deter an economy that is growing too fast. You might ask why would the Fed want to slow down the economy, isn’t a rapidly growing economy the prerogative of the Fed? True, this is one of the Feds roles, but unfortunately the economy can grow too fast and rapid growth can sometimes lead to uncontrolled inflation.

When the economy slows down however, and the Fed notices some weaknesses in the mesh, it lowers interest rate. A low interest rate makes borrowing money seem much more attractive and thus there is more cash flow. The renewed cash flow further invigorates the economy and it eventually it begins to grow.

After the recent economic recession, a recession that some believe is still not over, the Fed has dropped interest rates. Even though mortgage rates are not directly connected with the funds rate, banks offering mortgages tend to model mortgage rates after the funds rate. Simply, whenever the Fed makes a decision to lower the interest rate, the mortgage interest rate also decreases. Thus, it makes perfect sense for mortgage interest rates to be at an almost all-time low.

The average rate for a 30-year fixed mortgage is now a 4.58%, almost a full percentage point less than the rate a week ago. 15-year fixed mortgages are down to 4.13%
However, with lower mortgage interest rates comes the question: What does this mean for you as a buyer?

Well, obviously it makes buying a home much more affordable. With lower interest rates you can now afford to buy “more” house. However, a lower interest rate does not mean you should go out and buy the biggest house you can afford. A savvy buyer will use a decreased interest rate in order to buy a house that will not prove overly difficult to pay off. Resist the temptation to buy a house you can barely afford!

Interestingly enough, however, even with the tremendous drop in mortgage interest rates, buyers are sparse. Mortgage applications are constantly falling, and the purchase index of the Mortgage Bankers Association is at 13-year lows. This may not make much sense. Why are people not buying homes at a time with the lowest interest rates in the past 50 years? Well, with the advent of the housing crisis, credit standards have risen. Fannie Mae and Freddie Mac are not buying as many mortgages as they used to; as a result banks are less likely to loan people money for mortgages. By raising their standards, Fannie Mae and Freddie Mac have caused banks to raise theirs. Banks no longer want to keep mortgages on their books, preferring to sell them. The largest buyers of mortgages were and still are Fannie Mae and Freddie Mac. Now that the two companies are hesitant to buy mortgages from anyone but the most pristine buyers, most banks only lend to people they know will fit this criteria.

Tuesday, June 15, 2010

Rent or Buy?

The life-long question of real-estate is: Should you buy or rent? While the question has been around for as long as real estate has, answers have not. Lifelong renters move to a new town and become buyers. Lifelong buyers realize the error of their ways or have life changes and become renters. The truth is the subject is very subjective. What may appeal to one person, will not necessarily appeal to another? However, this is not to say that there aren’t hard facts behind the choice.

In order to determine whether renting or buying is better we must consider a few crucial factors:

  1. The rate at which price and rent grows or declines

  2. The duration of your stay

  3. How the real estate market in your city works.

For example; while it might be financially beneficial to rent in Manhattan due to the extremely high home prices, one is faced with a completely different set of circumstances in Phoenix where it makes more sense to purchase than rent.

For some quick number crunching, here is a helpful rent vs. buy calculator offered by the New York Times.

Before making a final decision, the buyer or renter needs to consider a few other key points.

  • What is the shape of their current income? Owning a home may sound nice, but if the buyer is planning on moving out soon it makes little sense to buy. It should be noted, the average homeowner stays in the same place for roughly 5-7 years, depending on the source. Although down payments are getting as small as 1% and the costs to purchase a home have declined historically, often it makes more financial sense to rent if the planned duration of your stay is relatively short.

  • Do your research before buying or renting. If you are taking out a mortgage to make a purchase, make sure you are getting the lowest interest rate possible. Once again, consider all possible risks of the investment you are about to make. Make sure that after the purchase you will still have some equity; i.e. that the price of the home if you decide to sell is greater than the unpaid mortgage and your financial situation is suitable for such a purchase.

Tuesday, June 8, 2010

Brokers for Buyers

The world of Real Estate is fraught with perils for the inexperienced buyer or seller.
Fortunately, trained individuals stand ready to serve as guides in this dangerous terrain. With years, and sometimes even decades, of experience, real estate brokers are not simple messengers between a buyer and a seller. They have certain skill-sets that can save a buyer time and considerable amounts of money. However, for some reason certain buyers choose not to employ a broker. This irresponsible choice is ironically fueled by a desire to expedite proceedings and save money – instead, it often leads to contrary results.

When a buyer first sets out to purchase an apartment, they are bombarded with listings. Some of those listings are, for a lack of a better word, spam. Buyers of new homes are subject to a constant barrage of phone calls from the builder’s agents, as are unrepresented buyers who frequent open houses. Brokers act as a buffer to those calls – protecting a buyer from unneeded attention. When a buyer begins to seriously look at certain properties, his broker can assist him in gathering information about the neighborhood where the buyer will be spending a considerable portion of their life.

Brokers are an amazing resource for information such as crime rate, school districts and demographics. In addition to helping a buyer choose a property to look at, they are also indispensable when the purchasing process begins. While brokers do not simply select prices for buyers, they can guide the buyer in choosing the right price by providing sold and closed comparables along with financial analysis of these numbers. This interpretation of the data greatly benefits the buyers by protecting them from paying too much and creating a sense of confidence otherwise absent from the process.

They can also give advice as to which vendors are the most competent and price-competitive. Additionally, what many buyers tend to not realize is the simple amount of paperwork that comes with buying a new property – the stack of paper in any given transaction can vary from one to three inches in thickness. Brokers have the resources needed to take care of that paperwork in the most efficient way possible. In addition, a good broker will sort through the package and present it in a simple and thorough manner.

Lastly, a good broker will provide guidance by answering questions even after the offer is accepted and once the buyer is under contract. Without proper guidance, even during the smoothest transactions, post-contract chores can be daunting. Every broker succeeds by getting good referrals and those referrals come directly from the buyers. Thus, it is in every broker’s interest to satisfy his clients and keep them happy. Brokers will do anything to help their clients, and there is no one better suited to help a buyer during one of the most important moments of their lives.

Monday, June 7, 2010

Chairman of the Board

I wake up at 8am sharp every day. My shower takes exactly 14 minutes. After I shave, I put on my bespoke suit and go downstairs where my company car is waiting. Nine hours later I return. I tip my driver and make way up to my apartment. On my table is a stack of folders. Attached to each folder is a small headshot – a necessary part of the application.

Some of you have seen me in person. You were trembling; I could see the fear in your eyes. You tried to appear nonchalant but I knew you were terrified. I am the dreaded president of the co-op board.

I have seen young people and old people. I have seen financially stable people, and I have seen people who know they cannot afford the co-op. I have pried into their private lives and know more about them than their mothers do. They come to me, with their deepest secrets hidden in the folder lying before me. They invariably look at me, size me up. Most of the time, I am older than they are – my hair already lined with silver. Without exception they try to connect with me, but they always fail.

The fact is that I am the chairman of the co-op board of a very prestigious Upper East Side building. Yes, that one. It is a 24-hour full service doorman building. The average price of an apartment is 2.5 million dollars. Most of the inhabitants work in finance. A few were born into money, but most of them made their fortunes through hard work. That means they are, for the most part, conservative upper-class citizens. Needless to say, that is the demographic they want to remain in their building. As the chairman, it is my job to make sure their wishes come true.

So when I look at you, sitting on the couch across from me and my colleagues, I almost always know if you will fit. We ask you about your pets, about your music habits, but those are filler questions. If you are at the interview, you have most likely passed the initial stages. At the interview, however, we learn about the real you.

Tuesday, June 1, 2010

Three Keys to Every Co-op Purchase in NYC

In Manhattan, it is standard practice to submit a financial statement and pre-qualification letter with every offer to a co-op. Even brokers with condo exclusives want to see a pre-qualification letter when you submit an offer. It is an important part of any negotiation to show your strengths and being pre-qualified will elevate your position when the seller is considering your offer. With lending standards continuing to tighten, it is in a buyer’s best interest to not only determine what they qualify for but to ensure the building qualifies too.

Most buyers spend a good deal of time combing the internet first and further determine their apartment and neighborhood preferences by attending open houses. Many believe they can afford an apartment at a certain purchase price, but rather than look at apartments you can’t afford afford, it is recommended to speak with a mortgage broker first.

It makes sense to look at what you can afford because this will help tailor your search from a financial perspective. Below is designed to explain three key components of every co-op purchase and to help smooth out the process.

Pre-Qualification Letter – If you are looking for a good interest rate, it is wise to contact a number of recommended mortgage brokers. Both banks and brokers offer a wider selection of lending options and it is a good idea to understand all of your options. It is important to know your borrowing potential, especially now with lenders tightening credit standards. In just 5-10 minutes on the phone a good lender will qualify you and present you with a pre-qualification letter for the file. This will offer you piece of mind, confidence and will help you understand what your monthly obligation will be after closing.

Financial Statement – Most co-op boards require a financial statement as a part of the board package and it is a standard to include this in the offer. Brokers typically use a standard REBNY (Real Estate Board of New York) form and using an Excel version makes it easy to organize the buyer’s finances and present them in an organized fashion. For the offer, general (rounded) numbers are acceptable, but when preparing the board package you will need to be specific and provide supporting documentation. It is good to fill this out early in the process and have your broker look it over to determine your purchasing power. Most co-ops in Manhattan look at the over financial health of the applicant (credit score, total income, time with employer, type of employment) but nearly every co-op requires the following minimum requirements.

  • Debt to Income Ratio – This ratio typically needs to 28% or less. It is determined by adding up all of your monthly debt plus the new mortgage and common charges (maintenance and taxes) divided by your total gross monthly income including any bonuses.

  • Liquid Cash Reserves – Most co-ops require 2 years of mortgage maintenance and taxes to be in “liquid” reserves after closing. They do not consider IRAs, 401Ks Keoghs, TIA CREFFs, or Real Estate assets to be liquid. Brooklyn co-ops are a little more liberal with this reserve requirement. It is best to inquire with the listing broker and get their idea of what the board finds acceptable.

Attorney – Some buyers are tempted to use a friend or family lawyer, a “generalist”, or an out-of-town attorney, but this is historically a risky choice. My suggestion is to use a Manhattan-based real estate attorney, or if purchasing in Brooklyn a NYC based attorney with experience in the buying and selling of co-ops and condos. The reason is because they will offer important advice throughout the process and conduct due-diligence on the apartment and building you are going to purchase. This is a must expense for even the most savvy investors and it is highly recommended to use a real estate attorney that knows the business. They will look over the co-op’s minutes, budget, tax statements/returns, contract, and prospectus/ offering plan. They will review all of the closing papers and walk you through the closing. They will also advise you of terms in the contract and make you aware of all of the issues after negotiating to an accepted offer. You will want a responsive and even keeled risk assessor to determine the potential issues and determine any potential future risks with your investment.