Portland area home buyers may have heard the announcement last week regarding FHA mortgage changes.  Why pay attention to these details since it only usually affects first-time buyers?  Well, changes to entry level financing affect all Portland real estate in reality.  Also, FHA loans are by far the most popular right now and are not used by only first time buyers.  Home purchasers take advantage of the low down payment option of 3.5% and that’s the attraction. 

Financing options during boom years of 2005 and 2006 made use of loser lending guidelines like the ever popular 80/20 loans which eliminated mortgage insurance.  Those days are in the rear view mirror.  Mortgage insurance is pretty much a requirment today for anyone putting less than 20% down.  Although no buyer ever wants to pay these extra fees they are a necessary evil and insure lenders against default.  Portland’s entry level market is sustained by first-time buyers coming in with minimum down.  If we went back to yesteryear requirements of 20% down minimum the market would be crippled. 

New FHA loan guidelines:

• Mortgage Insurance Premium (MIP) increase from 1.75% to 2.25% of loan amount
• FICO minimum (credit score) 580 to qualify for 3.5% down payment
• Seller credit to buyer’s closing costs down from 6% to 3% of purchase price
• Mortgage Insurance Premium payment shifted some cost from up-front MIP to annual MIP

What does this mean for the Portland real estate?  Since first time home buyers drive the entire housing model, without these there are minimal upper end sales.  Move-up buyers are critical to the cycle.  Looser lending guidelines generate more buyers, tight guidelines eliminate qualified buyers.  Changes mentioned above are tighter and will have some affect on Portland house sales. 

Most area home buyers come in with only 3.5% total cash (the down payment) for their first home.  Statistically that’s just reality.  Sellers often are requested in the offer to pay buyer’s closing costs (loan costs) which keeps cash out of pocket to a minimum.  Figure $200,000 houses for sale in Portland will cost buyers closer to 4% of purchase price, or $8000.  With new seller contribution limits going from 6 down to 3 percent this leaves buyers coming up with the difference.  More money out of pocket is now required to get into a house, potentially.

Tightening restrictions cautiously and slowly is key to not rocking the already fragile housing market.  My guess is that overall we’ll see minimal affect on Portland real estate in general and it’d take a micro-economic guru to place figures on such changes.  Yes, home buyers may have to come up with slightly more money but we’re only talking another thousand or two and if cash is really that tight buyers may want to build up a bit more reserve before purchasing anyway.  No one wants to be house rich and cash poor, right?  Something to consider…

OK, have to comment on recent influx of hype regarding how fantastic lease options are.  Since investments in Portland real estate have chased the national numbers we knew that there’d be new schemes making headlines and sure enough, The Oregonian newspaper picked up on it.  Interesting that this subject comes up more prominently while house sales are slow.  Maybe there’s a reason?

A quick overview of lease options

Agreement is made between buyer/tenant and seller/landlord.  Buyer may come in with zero down or thousands to “purchase the option.”  Seller is essentially renting his home for a premium in rental payments and contributing this premium amount towards buyer’s down payment.  At the end of the lease term, say 12 months, buyer has an option of purchasing the house for a preset amount.  Should buyer choose to not exercise his option he forfeits down payment and/or rent premiums.  While contracts can vary significantly, this is the overall premise.  Buyer is purchasing the Option to Purchase, it’s not free!

Why do a lease option?  From a prudent financial or conservative buyer standpoint… beats me.  From a seller/landlord standpoint, go for it.  These definitely benefit the seller in our current market.  A few years back this scenario may have benefited the buyer… maybe.  Though, in a hot real estate market why would a seller jeopardize an immediate sale by taking a risk on lease options?  He probably wouldn’t and that’s why these deals weren’t around in 2005 – 2006.

Immediate gratification

Many Portland home buyers choosing this avenue are doing it for one reason.  Financial issues.  Most likely that financial issue means not qualifying for the purchase, waiting for another house to sell, or bad credit.  Here’s a stretch; The best reason for obligating yourself to a lease option is that a particular house is so incredibly perfect that nothing like it will ever be available in the future, it’s one in a million.  Not leveraging yourself further would be catastrophic!  Now, how many buyers fall into this category?

The sales pitch

1. Get into a house while cleaning up your credit.  Lease options do get you into a house, at significant cost.  If you’re cleaning up credit could this money be applied towards the credit problems, accelerating a good credit rating?  What if mortgage rates go up before credit is repaired and buyer still doesn’t qualify?  Lease option money is out the window.

2. Get into a new house while waiting for your old house to sell.  Lease option again gets you into a new house.  One of the risky things about Portland’s current real estate market is that selling a house is not a quick process.  Putting the cart in front of the house is part of the reason we’re in this housing predicament.  Buying before unloading the old property means double mortgage payments.  If you really have to move into a new place, rent (with no option).  Payments will be lower than those with a lease option.  Plus, if the market does slide another 10% in 2009 then that option price originally set is not going to be very attractive!

3. Get into a new house while building landlord/rental history.  This was a new one to me but recently had to hear the pitch from a mortgage broker on why lease options were a viable avenue.  Theory is that lending guidelines have tightened and banks are requiring that keeping an old home as a rental requires it’s track history to be 6 months long before rental income can be counted.  Again, if you really have to move into a new place, rent first.  You’ll be money ahead on a monthly basis and in 12 months you may not even want the house you’re lease optioning!

Opportunities to buy a house in Beaverton, Lake Oswego or anywhere around Portland’s metro areas have never been greater but think twice about doing it via a lease option.  For more information on Portland real estate visit our website.   www.maxwellsinclair.com

It’s a buyer’s market here in Portland Oregon and everyone knows it.  Prices have changed dramatically over the last year or so, home buyers can reap big benefits.  While exactly where the market will land is unknown one thing is certain when looking at history; It’s a better time to buy now than within the last three years!

Here are a couple of buyer tips:

1. Look at the comparable recent sales and make an offer lower than perceived market value.  Notice that I didn’t say lowball the heck out of 20 houses.  This approach is a giant waste of everyone’s time for the most pat.  Comparing current sales data is required, regardless of market conditions and most everyone does it.

Let’s say for example that you’re looking to buy a house in Beaverton Oregon.  Comps on the house of choice point to market value being $300k.  Given current real estate conditions a realistic offer may be $280k.  Most sellers will probably counter at a higher price.  Stick to your guns and counter back with original offer price.  Leave the ball in the seller’s court.

2. Don’t get emotionally attached to the outcome.  This tactic will suit you well in the long run.  People tend to pay more once they’ve mentally moved into a house and started arranging furniture.  Look at home buying from two standpoints.  It’s a place to call home and an investment.  Money is made on the purchase not the sale.  Disengaging from the outcome of your offer keeps the decision more business like.  So a seller doesn’t accpet your offer.  Big deal.  Plenty more to choose from!

3. Knock the price down after inspection.  Some buyers want to play hardball and really push for a lower purchase price.  Others would prefer a softball approach.  It’s up to you and your Realtor can address either avenue.

Once home sellers come to an agreement arrangements for their move become more solidified.  Much of this goes back to emotions.  Mentally, they’ve sold the house and are moving on.  Buyers control transactions for the first few weeks and it’s up to them to continue or potentially walk away after inspection.  Seller options are limited.  Typical inspection periods run 10 business days here in the Portland Metro area.  Pushing inspection negotiations towards the 2 week deadline gives sellers more time to move foreward with their plans.  Remember, they’re selling because they want something…

Get that professional home inspection.  Minor or major, suggested repairs show up 99% of the time during these closer looks.  One of the most common approaches is to get contractor bids for such repair points and go back to sellers asking for a price reduction (compensating for repairs costs).  Who says it has to be a dollar for dollar reduction?

Buyers willing to play hardball can come back with a take-it-or-leave-it approach.  Asking for additional money to compensate for (insert additional excuses here) house/market shortcomings is an aggressive approach.  Sellers will be ticked but they’re faced with a choice.  Move on with bird in hand or risk putting their home back on the market only to weather additional market downturn or potential repeat of a similar offer.  Tough one…

For the most part experience says that the majority of home buyers take a balanced approach and ask only what is perceived as a reasonable repair cost.  Price still goes down in the end and buyers can address non-critical repairs at their leisure.

Additional Portland Metro area home buying tips are available at www.MaxwellSinclair.com