Why Should a Home Seller Retain a Licensed Broker for Representation

In a real estate market characterized by trepidation and confusion about whether this may be a good time to sell a home in Charlotte, it seems appropriate to discuss the reasons a seller of real property would be well advised to retain a competent licensed broker to represent him or her in the sale of such a valuable asset.  Let’s begin by mentioning the consumer information brochure, Working with Real Estate Agents, published by the North Carolina Real Estate Commission.  This document outlines the permitted agency relationships in North Carolina, and the important features of each.  Every real estate agent licensed in the state is required to present this document to a prospective client when the parties begin discussions of matters substantially important to the interests of that prospective client, whether buyer or seller.

 

Licensed real estate brokers are required to maintain a high level of professional and ethical standards in dealing with a client and the public, and the failure to do so can result in disciplinary action by the NC Real Estate Commission.  But what are some the practical reasons a seller would be well advised to retain a licensed real estate broker?  After all, the seller might save some money by avoiding such a relationship and going it alone, right?

 

One compelling practical reason for retaining representation is access to the Multiple Listing Service (“MLS”), a centralized database of information for homes in a given geographical area.  (You can access the entire MLS database from the home page on my web site… FREE.) This database is used very heavily by buyers’ agents, and a home that is not listed in the MLS may very well go unnoticed by buyers who are ready, willing and able to purchase it.  Further, since most buyers who become aware of a home via the MLS necessarily come with a buyer’s agent, it is very likely that buyer’s agent has made sure the buyer is pre-qualified for any financing the buyer will need to make the purchase.  Otherwise, the buyer’s agent is likely wasting everyone’s time, including his or her own.

 

Having a buyer who is represented by his or her own agent express interest in the purchase of your property is therefore a good thing because you can be reasonably assured that the buyer is ready, willing and able to proceed to closing.  But a represented buyer negotiating with an unrepresented seller can mean that the seller is functioning at real disadvantage.  The buyer’s agent should be well aware of current market conditions, including recent comparable sales prices… the agent should be quite familiar with the contracts, documents and forms approved by the NC Bar and the NC Association of Realtors… the agent should be familiar with the processes and procedures for accurately memorializing final agreement of the parties and taking that agreement through to closing.  However, if you read the Working with Real Estate Agents consumer information brochure mentioned above, you understand that a buyer’s agent represents the buyer, not the seller.  The buyer’s agent’s duty is to get the best deal he can for the buyer, not the seller.  So a seller who is not intimately familiar with the current market… or the contract and legal documents typically used in a transaction… or the procedures followed to take a deal through to successful closing, is at a distinct disadvantage if he or she is not represented by his or her own seller’s agent—someone who owes all his or her own fiduciary duties to the seller.

 

A good, professional, ethical real estate broker/seller agent can therefore not only successfully market a home for maximum exposure to buyers who are qualified to purchase the home, he or she can negotiate the best price possible (with the participation and final approval of the seller, of course), has sufficient familiarity with the legal documents typically used in a transaction to make sure that the final documents the parties execute accurately reflect the deal the seller has actually agreed to, and he or she should be fully aware of the processes and procedures that take that agreement through to final, successful closing.  Most transactions in the Charlotte metropolitan area involve hundreds of thousands of dollars… and sometimes millions.  It therefore seems wise to seek the representation of someone who is truly familiar with, and can take reasonable control over, all the variables described above, while being bound by NC law to represent the seller’s best interests throughout the transaction.  It’s really just common sense. 

 

Abraham Lincoln famously said, “A lawyer who represents himself has a fool for a client.” A similar principle applies to the seller of property who decides to “go it alone.”  You may think you know the current market, but may not be intimately familiar with the legal documents that will protect you in the transaction.  You may have a good working knowledge of processes and procedures typically followed to get your transaction to closing, but not have the ability to get your property maximum exposure to people who are ready, willing and able to buy it. Unless you are engaged full time in the real estate business, it is very unlikely you possess all of the current skills needed to successfully maximize the return on a very valuable—and in most cases—your most valuable investment.

 

In this Continuing Sellers’ Market, is Updating a Home Prior to Sale Advisable?

 

We are currently seeing a continuation of the hot “sellers’ market” in the Charlotte metropolitan area.  Like many other regions of the country, inventories of homes for sale remain low and buyers find themselves competing to find good values.  A question frequently asked by sellers in this market is: “Should I spend the money to update my home prior to marketing it for sale?  Won’t this maximize my final contract price?”  The answer to the second question is probably “yes.”  But whether it is advisable to spend money on updates, how much money to spend, and whether those expenditures will increase the final contract price sufficiently to make those expenditures worthwhile are more complicated questions.

 

The answers depend on a lot of variables, such as: Where is the home located?  Is it an older “original” home located in a neighborhood that is seeing a lot of revitalization?  If so, more extensive renovations may be advisable.  The seller would really be taking his or her own home of many years and doing what many flippers do—transforming an “old original” into a desirable modern turnkey property.  But larger renovations only make sense if they are very carefully managed and the home is otherwise positioned to take advantage of a revitalization trend in the particular neighborhood or area.  It doesn’t make a lot of sense to take a home that is worth $300,000 “as is” and spend $50,000 to give it a market value of $350,000.  You would obviously just be breaking even.  But if you are capable of managing the work—using contractors you trust and whose estimates and work you can rely on—and you can take that $300,000 home and transform it into a home you can realistically expect to get $350,000 for after spending $25,000 on updates, the money may be well spent and the aggravation may be worth the roughly $25,000 reward.

 

However, if you have a relatively new tract home that has seen ordinary wear and tear over five or six years but has otherwise been reasonably well maintained, it probably does not make sense to tear out the kitchen or renovate bathrooms.  You might make the home look “flashier,” and it will probably sell faster at its market value, but it is very unlikely—even in this sellers’ market—to sell significantly above its market value.  In this case, refreshing interior paint may be advisable and carpet cleaning or carpet replacement might be a good idea, but larger expenditures are not likely to move the final sale price up enough to make them worthwhile.

 

As in most other undertakings in life and in business, the key to making a truly wise decision on how much to renovate a home for resale is correct, complete and current information about the particular home and recent surrounding comparable sales. If there is such a demand for homes in the same neighborhood or area, it may make little difference to the pool of interested buyers whether the home has been significantly updated.  In fact, it might even be advisable in this market to take a home that the data indicates should have a fair market value of $275,000 “as is” and list it for $285,000 or so without spending any money on updates.  The amount of interest received may help the seller make a decision on whether they want to go through the time, expense and stress of managing contractors and renovations.  The seller might well find that he or she receives multiple offers on that $285,000 listing price in this market, and perhaps even gets an offer above the listing price.

 

So the honest answer to the question of whether and how much to update a home prior to resale in this hot sellers’ market is “it depends.”  It depends on the facts and recent sales data surrounding the particular home.  The best advice I can give the seller is to partner with a competent professional to gather the information you need to make an informed decision.  Doing so will enable the seller to maximize his or her return on this very large investment.

Prepare Yourself in this Difficult Charlotte Real Estate Market to Act Quickly

 

Many homebuyers around the country are experiencing frustration at low inventories of available homes and the resulting multiple offer situations that lead to “bidding wars” for available properties.  The Charlotte metropolitan area (Charlotte… Matthews… Mint Hill… Indian Trail… Huntersville… Concord… etc.) is no exception.  So how does a buyer address this situation and win?

 

The answer is preparation.  The first step in the process of finding a home or investment property is the same in any market: Get mortgage pre-approval and a letter of pre-qualification from your lender BEFORE you begin looking for a home.  Why?  This accomplishes several critically important things.  First, it allows you to know with some certainty what you can and cannot afford.  Why fall in love with a $450,000 home if you can qualify for only $350,000 in financing and have no other resources?  Secondly, sellers in this market (and most other markets) now insist that all offers be accompanied by either a pre-approval letter for financing or proof of funds on deposit to close a cash purchase.  Why would a seller commit to a contract that takes his or her property off the market with having some assurance that the buyer can actually close?  Pre-approval saves you critical time that would have been wasted getting pre-approved AFTER finding a home in a market where there will almost certainly be other buyers who are prepared to make an immediate offer on the home you think would be perfect for you. 

 

After getting that all-important pre-approval letter from you lender, do your homework.  There is far too much riding on the accuracy of your information to rely on those freebee sites like Zillow and Trulia and their notoriously inaccurate “Zestimates” of value.  Find a realtor who has access to the most recent data and carefully research the market value of any home you might want to make an offer on.  As our company motto goes: “Solid analysis identifies great opportunities.”  There is no substitute for doing your homework, and doing it well.  Armed with a solid opinion of market value, you have a ceiling value above which you are unwilling to bid against other buyers competing for the same home.  If others are willing to bid above fair market value for a home, let them have it and move on to the next. 

 

Preparation.  It is a key to success in most things in life, and it is certainly critically important in buying a home or investment property.  Get organized.  Do your homework.  Know the current market in your areas of interest; and position yourself to move quickly and decisively on an opportunity.  A large part of this is also knowing when to “pull the plug” on negotiations and move on to the next opportunity.  In the current real estate market, it’s all about preparation.

 

For more information and to search the entire Charlotte area MLS system for homes, townhouses, condos, land, and more, FREE, go to www.EricDorerRealEstate.com.

Title Insurance – What is it and Why Should a Homebuyer Have it?

 

Anyone who has ever purchased a home or other real estate—especially if that purchase was made with mortgage financing—has seen an item on the Closing Statement entitled “title insurance.”  Most buyers do not really understand or appreciate what title insurance is, and why it is in their interests to have it.  Allow this article to provide a simple explanation.

 

After a buyer has contracted to purchase property, but before closing of that purchase and sale, attorneys will search and review the Public Records to make sure the seller has the right to convey title to that property, free and clear of all claims or liens.  If any claims (such as mortgages) or liens (such as claims of unpaid contractors for work done to improve the home) are properly recorded in the Public Records and identified by this “title review,” valid claims and liens will have to be paid at closing out of the seller’s proceeds, and the seller will be paid the balance of the purchase price remaining after such payments.  This process is designed to make sure that the buyer gets good and marketable title to the property, free and clear of any claims except claims made against the buyer’s own interest—such as any mortgage the buyer uses to complete the purchase.

 

What would a buyer do if the attorneys missed something in their title review?  What options would a buyer have if a lien is later claimed for work done for the seller, but that lien may not have been adequately preserved or “perfected” according to law?  Defending a lawsuit over such matters might be more expensive than paying the lien.  Suing the attorneys who made the mistake by failing to identify a valid claim might be another option.  But, again, lawsuits can be time-consuming, stressful and expensive.  Even if the buyer were ultimately to prevail, it might cost the buyer many thousands of dollars to get to the point of winning a case in court.  This is the purpose of title insurance.

 

Like most other insurable risks, it is common for buyers of real property to purchase insurance covering the risk that some claim or lien, whether valid or perhaps even invalid or frivolous, may be made against the buyer’s ownership interest in that property up to the date the purchase of that property is closed.  If a claim is made against the property, the buyer has the right to file a claim against that policy of title insurance; and the title insurer has the obligation to “take it from there,” whether that means defending against a claim in court or paying a valid claim so that it is released.  If the buyer purchased the property with mortgage financing, their lender required title insurance for these reasons.  The lender wanted insurance protecting its sizeable loan to purchase the property.  The premium for the “simultaneous issue” of an Owner’s Policy of title insurance is relatively small, and the homebuyer is well advised to pay that premium to make sure there is coverage for claims that might exceed the amount of the mortgage.  The most important function of title insurance is to provide legal protection of the buyer’s title to the asset he or she is purchasing.  An additional benefit is the peace of mind it provides. Again, however; title insurance provides coverage up to the day of closing, but not afterward. A homeowner should be well aware of any valid claims or liens he or she allows to be perfected against the property AFTER he has become owner of record, as long as the claim or lien is not fraudulent. A fraudulent lien is another issue, but it is also extremely rare.

 

To learn more and to search the entire Charlotte area MLS system for homes, townhouses, condos, etc. FREE, go to www.EricDorerRealEstate.com.

Why Should the Seller of Real Estate Retain a Licensed Broker for Representation?

 

In a real estate market characterized by trepidation and confusion about whether this may be a good time to sell a home in Charlotte, it seems appropriate to discuss the reasons a seller of real property would be well advised to retain a competent licensed broker to represent him or her in the sale of such a valuable asset.  Let’s begin by mentioning the consumer information brochure, Working with Real Estate Agents, published by the North Carolina Real Estate Commission.  This document outlines the permitted agency relationships in North Carolina, and the important features of each.  Every real estate agent licensed in the state is required to present this document to a prospective client when the parties begin discussions of matters substantially important to the interests of that prospective client, whether buyer or seller.

 

Licensed real estate brokers are required to maintain a high level of professional and ethical standards in dealing with a client and the public, and the failure to do so can result in disciplinary action by the NC Real Estate Commission.  But what are some the practical reasons a seller would be well advised to retain a licensed real estate broker?  After all, the seller might save some money by avoiding such a relationship and going it alone, right?

 

One compelling practical reason for retaining representation is access to the Multiple Listing Service (“MLS”), a centralized database of information for homes in a given geographical area.  This database is used very heavily by buyers’ agents, and a home that is not listed in the MLS may very well go unnoticed by buyers who are ready, willing and able to purchase it.  Further, since most buyers who become aware of a home via the MLS necessarily come with a buyer’s agent, it is very likely that buyer’s agent has made sure the buyer is pre-qualified for any financing the buyer will need to make the purchase.  Otherwise, the buyer’s agent is likely wasting everyone’s time, including his or her own.

 

Having a buyer who is represented by his or her own agent express interest in the purchase of your property is therefore a good thing because you can be reasonably assured that the buyer is ready, willing and able to proceed to closing.  But a represented buyer negotiating with an unrepresented seller can mean that the seller is functioning at real disadvantage.  The buyer’s agent should be well aware of current market conditions, including recent comparable sales prices… the agent should be quite familiar with the contracts, documents and forms approved by the NC Bar and the NC Association of Realtors… the agent should be familiar with the processes and procedures for accurately memorializing final agreement of the parties and taking that agreement through to closing.  However, if you read the Working with Real Estate Agents consumer information brochure mentioned above, you understand that a buyer’s agent represents the buyer, not the seller.  The buyer’s agent’s duty is to get the best deal he can for the buyer, not the seller.  So a seller who is not intimately familiar with the current market… or the contract and legal documents typically used in a transaction… or the procedures followed to take a deal through to successful closing, is at a distinct disadvantage if he or she is not represented by his or her own seller’s agent—someone who owes all his or her own fiduciary duties to the seller.

 

A good, professional, ethical real estate broker/seller agent can therefore not only successfully market a home for maximum exposure to buyers who are qualified to purchase the home, he or she can negotiate the best price possible (with the participation and final approval of the seller, of course), has sufficient familiarity with the legal documents typically used in a transaction to make sure that the final documents the parties execute accurately reflect the deal the seller has actually agreed to, and he or she should be fully aware of the processes and procedures that take that agreement through to final, successful closing.  Most transactions in the Charlotte metropolitan area involve hundreds of thousands of dollars… and sometimes millions.  It therefore seems wise to seek the representation of someone who is truly familiar with, and can take reasonable control over, all the variables described above, while being bound by NC law to represent the seller’s best interests throughout the transaction.  It’s really just common sense. 

 

Abraham Lincoln famously said, “A lawyer who represents himself has a fool for a client.” A similar principle applies to the seller of property who decides to “go it alone.”  You may think you know the current market, but may not be intimately familiar with the legal documents that will protect you in the transaction.  You may have a good working knowledge of processes and procedures typically followed to get your transaction to closing, but not have the ability to get your property maximum exposure to people who are ready, willing and able to buy it. Unless you are engaged full time in the real estate business, it is very unlikely you possess all of the current skills needed to successfully maximize the return on a very valuable—and in most cases—your most valuable investment.

For more information and to search the entire Charlotte area MLS system FREE, go to www.EricDorerRealEstate.com

House Flipping 101: Part Three - Beware the “Hard Money Lender”

 

In the April, 2023 edition of this blog, I began a discussion of I began a true story about a prospective flipper I called “Dave.”  Dave was a novice flipper who thought he had his financing in place for his first project—a purchase price up to $250,000 and additional renovation financing up to $50,000.  The hard money lender who had issued the pre-approval letter in exchange for Dave’s payment of a $3,000 “membership fee” stated in the letter that the pre-approval was for financing “up to 70% of ARV, with interest of 18% per year for a 5 month loan term,” PLUS 6.5 points.  They might agree to a 3 month extension of the loan term, in exchange for the payment of an additional 1% of the entire loan amount per month.  Dave didn’t understand anything beyond the notion that he had been approved for a purchase up to $250,000 and construction financing of up to $50,000.  He told me he had informed the lender he had no money of his own for the project; and when he contacted the lender for some clarification at my insistence, the lender told him that “nothing down” deals are possible.  He just needs to find one that will work within their criteria.  Simple, right?

 

Let’s take a look at the not-so-fine print.  What is 70% of ARV?  ARV means “after repair value.”  Loaning based on a percentage of ARV would therefore mean a larger loan amount than loaning on the purchase price.  But who decides on what that ARV amount is?  Answer: the lender’s appraiser, of course; and the lender’s appraiser in this case charges $550 per appraisal.  Even more importantly, 70% of ARV may not be as generous an amount as one might think in the real world—at least not in the real world as it exists in Charlotte, NC.  Let’s take a real world example:

 

We found a house in a decent area that needed significant renovation.  That house was priced at only $235,000 and I estimated ARV might realistically be as high as $357,000.  Assuming this lender’s appraiser agreed on ARV, 70% of ARV would therefore be .70 X $357,000 = $249,900.  This is the total the lender would loan on this project.  So, to keep things simple for now, if Dave bought this home for $235,000 and the lender was willing to loan up to $249,900 for the project, you would think he would have $14,900 left toward renovations.  I will return to this later, but to keep this example simple for now, recall he needs at least $50,000 for renovations.  So in this case, Dave would need to find at least $35,000 for renovations from some other source.  Again; I will revisit this notion because there is another twist.

 

But what about lender fees?  How much would they be and when would they be due and payable?  Again; keeping things simple, $249,900 loan amount at 18% would be a total of $44,982 per year in interest.  $44,982 divided by 12 months = $3,748.50 per month in interest.  If the project could be completed and resold in only 5 months, total interest on the loan would be $18,742.50.  In addition, there would be 6.5 points payable.  $249,900 X .065 = $16,243.50.  Thus far, we have interest and lender fees for this project of $18,742.50 + $16,243.50 = $34,986.00. 

 

So in this simplified true life example, we have $14,900 above the purchase price available from this loan for renovations, and we have $34,986.00 in interest and lender fees.  Therefore, the lender fees far EXCEED the funds Dave thought would have been available for renovations.  Most renovations would actually have to be paid for by Dave, not this loan.  And this does not include appraisal fees, closing costs or broker commissions payable on the resale of the home.  In theory, if Dave had the cash to pay for renovations—which would almost certainly have exceeded $50,000 for this home in any case-- it might be possible for Dave to make some small profit in the end.  That would have gone something like this:

 

Purchase Price:                                                                        $          235,000.00

Loan interest and points (5 months)                                                     34,986.00

Renovation Costs minimum                                                                  50,000.00     

Subtotal costs:                                                                         $          319,986.00

Broker commissions on resale (customarily 6% of sale $)                  21,420.00

3 months of interest at 1% per month to extend to 8 mths                     7,497.00

Appraisal and closing costs estimate                                                      2,500.00

Total                                                                                        $          351,403.00

                                                                                                ==============

 

ARV:                                                                                      $          357,000.00

Total costs above:                                                                   (           351,403.00)

Balance:                                                                                  $              5,597.00

                                                                                                ==============

In this overly simplified scenario above, Dave might have actually made $5,597 or so on this project, after paying for most renovations from his own pocket.  Of course, if renovation costs exceeded $35,000—and they would probably have in this case due to the extent of updating needed—we would have barely broken even on the project.  The lender would have made about $42,500 on the project; and nothing would have even gotten off the ground if Dave did not have $35,000 from some other source for the renovations. 

 

But there was another very important detail about this real life transaction.  This lender would have required Dave to prepay all interest on their loan, and their points when Dave closed the purchase of this project.  On the day he closed his purchase, Dave would have bought a house for $235,000, and immediately secured a loan against it for $249,900.  IN ADDITION, this lender would have required Dave to place in escrow the total estimated renovation costs of $50,000 on the day he purchased the home.  FURTHER—and this is the twist I referred to earlier—this lender also required that all their interest and fees be prepaid ON THE DAY OF CLOSING.  So we have a purchase price of $235,000 and a loan of $249,900.  But we have lender fees of $34,986 that need to be paid on the day of closing.  $235,000 purchase price PLUS the advance payment of lender fees of $34,986 = $269,986 PLUS $50,000 in renovation costs going into escrow = $319,986 needed by Dave on the day of closing of his purchase, just to buy a home for $235,000.  Recall that the loan maximum was $249,900.  So Dave would need to deposit $70,086 ($319,986 - $249,900 = $70,086 on the day of closing or this lender would not fund the $249,900.  Huh?  What about those “nothing down” deals that sounded so good when Dave paid his $3,000 “membership fee?”  And to add insult to injury, even if Dave had been able to pay all these amounts and successfully finished and re-sold the home for $357,000, he would make only $5,597 for his heroic efforts.

 

The simple truth is that the above scenario is not much of a formula for financial success.  And if this were the only way to finance a flip project, the reader could be forgiven for concluding that house flipping cannot offer much financial opportunity—especially in the current real estate market in which inventory is low and purchase prices for even homes in need of significant renovations are up.  What is wrong with this picture, of course, is that the hard money lender took all the profit the flipper would have otherwise made on the project.  Fortunately, there are alternatives to hard money financing.

 

In the next installment of this blog post, I will show you that there are alternatives for the Dave—especially as an owner-occupant of the home in which he intends to invest.

House Flipping 101—Part Two: Beware the “Hard Money Lender”

 

One of the major obstacles most first time house flippers encounter is how they will finance that first purchase, and then how they will pay for renovations.  Traditional lenders and large banks are as unlikely to finance the first home flip project as they are to finance a start-up business of any kind.  It is common knowledge that most new businesses fail in their first year due primarily to “lack of capitalization”—that is, not having enough access to the cash they need to start and sustain the business in its early stages, before it becomes profitable.  House flipping is like any other business in this respect.  A flipper who is “under-capitalized” is operating with a large and often insurmountable handicap.

 

In business and in real estate, there have always been lenders who are willing to accept additional loan risk in exchange for higher interest rates and loan fees.  There are some who even claim to loan based solely on the borrower’s credit score… or finance “zero money down” purchases… or help lead you through your first flip project.  BEWARE. These people are not stupid and they know how to protect themselves.  Their overarching goal is to maximize their own profits, not yours. Education and careful analysis are keys to succeeding in any business, and there is no substitute for doing your homework.  If you don’t really understand the most basic concepts such has an annual percentage rate or lender “points,” you are probably not ready to take on your first project.

 

Here is a true story – a “real life” example of someone I encountered two weeks ago.  A young man with three young children decided house flipping could be a nice supplement to his regular income.  Let’s call him “Dave” for the purpose of this story.  Dave really had no experience with house flipping, or investing or home buying in general.  In fact, he and his family were renting the home they lived in.  He had little money saved and no access to cash.  But he found a lender online that said had “good reviews.”  He contacted the lender, and the lender told him they specialize in flip projects and they would help walk him through his first several projects.  All he needed to do to get started was pay them a $3,000 “membership fee” and he would be approved for up to $250,000 to purchase a project and up to $50,000 for renovations.  Wow, thought Dave.  The online reviews are good.  They say the lender is “expensive,” but that is to be expected.  “Sign me up.”

 

WARNING ONE: If a supposed lender changes you some fee before you have even found your first project, run for the exit.  You might be amazed at how many trusting souls are willing to pay essentially their only savings to someone who claims they can make their lives easy for them.  Dave paid his $3,000 and he received a letter from the lender saying he had been pre-approved for up to $250,000 in financing and up to another $50,000 in renovation funding, subject to the lender’s underwriting and other guidelines.  Pre-approval letters, even from the largest banks, reserve the right to underwriting review, of course.  So Dave felt he was ready to go to work.

 

Dave contacted me to find him his first project.  I didn’t know Dave, but I cautioned him that inventory is low in the Charlotte metro area, like it is in many other regions of the United States.  Dave needed to have his financing in place before we started looking.  The best values are likely to receive multiple offers, and an offer submitted without proof of cash to close or pre-approval from a lender is unlikely even to be considered by the seller.  Dave assured me he had been pre-approved to purchase a home up to $250,000, and he sent me a copy of his pre-approval letter. 

In the next month’s blog post I will specifically describe what was wrong with the picture painted above.  I’ll give you a hint: it had something to do with Dave’s lack of even the most basic understanding of finance terms and conditions, and his willingness to trust that this lender was as interested in his success as they were in their own bottom line.  I will end this blog post on a positive note: house flipping is alive and well, even in the most difficult market.  But research, education and caution are a wise foundation for this, or any business.  In the next blog post, I will conclude “Dave’s story.”

House Flipping 101 Revisited… It’s Not Rocket Science

 

Back by popular demand, we are revisiting our discussions of House Flipping over the next couple of months.  Judging by the popularity of some reality television programs, house flipping remains a subject of some fascination to the general public.  There are even “free seminars” offered by some of the television personalities featured in these programs.  Of course, the “free” seminars are really designed to convince novices that they need to buy that television personality’s books… or DVDs… or “system.”  Save your money!  It’s not rocket science. 

 

All the same general business principles that make or break any business endeavor apply to flipping houses.  You need to buy the house “right.”  That is, at a price that enables you to budget adequately to renovate and resell the home for a profit.  You need to have good, honest, reliable tradesmen (e.g. roofer… plumber… electrician… carpenter… etc.) ready, willing and able to do the renovations for you.  (The flipper himself or herself is very rarely equipped to handle renovations, regardless of what you may see on television.)  And you need to know what you can expect to resell the home for when it’s finished—its “After Rehab Value or “ARV.”  You need to establish a solid budget for the rehab even before you decide what to offer for the home when you are considering its purchase.  And you need to stick as closely to that budget as you possibility can—which is often much easier said than done.  (Any budget should include consideration of unanticipated expense and cost overruns—usually about 10% of the total budget.)

 

It’s not rocket science.  But, like any business, it requires preparation, budgeting, research, and planning.  It also requires adequate cash flow and “capitalization”—that is, you need to have the funds available to actually accomplish what you plan to accomplish.  There are lenders who specialize in financing the purchase of investment properties.  Some are “expensive” and care needs to be taken with this.  Those buyers who have good credit and some money to put down have many options for capitalization of their project(s). Capital can come in the form of savings, a loan from relatives, etc.  But you don’t want to get started before you are ready to take the project through to its conclusion.  That is true of any business. 

 

And just as a clothing retailer needs to know something about fashion, supply, demand, etc., so a house flipper needs to know the market in his or her area.  Market conditions are constantly changing, so what you knew six months ago may not apply today—something most of the sellers of those “systems” don’t tell you.  You need to do your homework and stay current.  But the good news is, you don’t need to go it alone.  There are professionals who will help you.  A good real estate broker should already know the market, and if he represents you in a purchase, the seller will pay his commission.  His services cost the buyer nothing.

 

In coming months, I will unpack each of these issues.  And in the meantime, if you would like more personal assistance, please feel free to contact me. To search the entire Charlotte area MLS for all homes, townhouses, condos, etc. FREE, go to my web site.

Exploring Metropolitan Charlotte: The Town of Troutman

In this edition of our monthly real estate blog, we will explore the Town of Troutman.  Troutman is a small town of only 4,000+ residents, located about 35 miles north of Charlotte.  The exponential growth of Charlotte has made its way up to Troutman, with approved building permits indicating an increase in residents to over 11,000 in the coming year or so.  The town is located in Iredell County, and combines a rural feel within easy access to a major southeastern City, Charlotte.

 

Home to Lake Norman State Park, boating, fishing and swimming are among the family-friendly activities offered in the community.  Parks and recreation abound, along with a Greenway System designed to allow the town to retain its rural feel.  Open natural spaces characterize the town, and outdoor sports and activities are preferred by many residents.

 

The rapid growth of Charlotte and the areas surrounding the city has caused increased demands on its road system.  One of the complaints of residents north of the city, as Troutman and Mooresville are, is the traffic congestion that frequently clogs the main artery to and from Charlotte: I-77, and a home buyer who works in Charlotte but wishes to explore the Lake Norman area as their next home is advised to drive I-77 to and from the city to make sure the trip will not become an issue for them.  Troutman, Mooresville and the communities surrounding Lake Norman provide a beautiful option for those who wish to retain relatively easy access to employment and commerce a short distance to the south, but the challenges to transportation posed by the ongoing growth of the area present issues that some might not care to deal with on a regular basis.

 

Expectations for Mortgage Interest Rates into 2023

In our February 2023 blog post, we will explore expectations for mortgage interest rates into 2023.  This is a topic of great concern among home buyers and home sellers alike because, as much as any other single factor, it can affect the strength and vitality of the residential real estate market.  As we discussed in our January blog post, the market in the Charlotte metro area is expected to remain strong into 2023, largely due to continuing high buyer demand and continuing low inventory of homes for sale.  In fact, Charlotte is viewed by many as one of the most attractive residential real estate markets in the country.  Among the large national aggregators of real estate data, Zillow predicts Charlotte will be the #1 hottest real estate market in 2023.

 

With this in mind, expectations for mortgage interest rates in 2023 will have a large impact on the Charlotte market.  Market watchers are aware that inflation in 2022 reached heights not seen in the U.S. in 40 years.  In response, the Federal Reserve raised its benchmark interest rate several times, in an effort to put the brakes on lending and inflation.  Of course, this in turn resulted in a rise in mortgage interest rates in 2022 from historic lows around 3% in 2021 to near 7% in 2022.  This made housing less affordable everywhere by causing the monthly cost of owning a home to rise significantly.  The very same 30-year $300,000 mortgage under which principal and interest cost $1,265 per month at 3% began to cost the borrower $1,996 per month at 7%.   

 

But the national economy did appear to begin cooling a bit by the end of 2022, with inflation dropping from a high of 9.1% in June of 2022 to about 6.5% by December of 2022.  This has led many to speculate that continuing increases in the Fed Funds Rate by the Federal Reserve in 2023 may be more moderate, as the Fed believes it is getting inflation under control.

 

This has caused mortgage interest rates to actually decline a bit from their high in December 2022 of 7.08% to 6.33% for the week ending January 12, 2023 for a 30-year fixed-rate loan.  There also remains a high demand on the secondary mortgage market for closed loans, and this has also placed pressure on the market to keep rates lower than they might otherwise be.

 

The Federal Reserve is likely to raise the fed funds rate a bit higher in 2023, but the success they appear to be having in moderating inflation, and the continued strength of the mortgage market and the residential real estate market overall has led many to expect mortgage interest rates to settle in 2023 somewhere between 5% and 6% for a 30-year fixed rate mortgage.  The days of 3% mortgages may be gone for a while, but a rate between 5% and 6% is still below the historical average since 1971 of just under 8%.  Combining this with the intrinsic vitality of the residential real estate market in the Charlotte metro area, 2023 may well be another good year for the Charlotte.

To search the entire Charlotte metro area MLS system for homes, condos, townhouses, etc.-- FREE-- go to www.EricDorerRealEstate.com

 

#Charlottehomesforsale #mortgageinterestrates #Concordhomes #Charlotterealestate

Charlotte Residential Real Estate Outlook for 2023

In this month’s edition of our Charlotte area real estate blog, we take a look at anticipated market conditions and performance in 2023.  There has been speculation about a national economic recession, inflation and their effect on residential real estate.  But, of course, real estate markets (like politics) are largely local, and they can vary a great deal depending on the city.  Cities like San Francisco and Seattle are expected to see the largest declines in property values, but most other cities in the country are expected to see values decline by only five to ten percent between January and August of 2023.  We do not expect a significant decline in values in the Charlotte metropolitan area.  Here is why:

 

The total inventory of homes available for sale in the Charlotte metro area has fallen from over 9,000 units in October of 2018 to under 1,900 units in February of 2022, but by November of 2022, inventory had rebounded to just under 6,000 units.  Of course, it is axiomatic that a shortage in the supply of anything, combined with a larger list of ready, willing and able buyers, causes the value/price of almost anything to rise.  If that is true, one would have expected more of a “buyer’s market” in 2018; and one would logically expect more of a “seller’s market” in November of this year, with a large number of buyers chasing relatively few homes available for sale.  That general principle has played out in Charlotte over the last several years.  And as inventory of homes available for sale has risen again—but only to a bit more than half of overall inventory in 2018—wild price increases we had seen in 2020 and 2021 moderated a bit toward the end of 2022.  But the market in Charlotte remains strong. 

 

Another major factor in the health of the housing market is mortgage interest rates.  In October of 2021, 30-year fixed rate mortgages were being written at a rate just above 3%.  But with the Federal Reserve’s efforts to curb inflation resulting in higher interest rates, the current rate for a 30-year fixed rate mortgage has more than doubled to over 6%.  Of course, this has an obvious impact on the affordability of a home.  For example, a $300,000 mortgage at 3.25% over 30 years would require monthly principal and interest payments of $1,306.  The same $300,000 mortgage at 6.5% would require principal and interest payments of $1,896 per month.  The same property at the same price is likely to cost a buyer $590 per month more in 2023 than it did in 2021.  That simple fact can remove many buyers from the market, although it is useful to put this into some historical context.  The interest rate for a 30-year fixed rate mortgage in the 1970’s was almost 7.5%  By the end of the 1980’s, that average rose to 8.78%.  Rates ended the 1990’s (a time generally associated with good economic conditions) at over 8%.  So our current rate of about 6.5% is not close to being historically high. 

 

The good news with respect to mortgage interest rates is they have not risen as far or as fast as some of the experts predicted, and they have not risen in direct proportion to interest rate hikes by the Federal Reserve.  There are a number of reasons for this, mostly related to the somewhat complicated functioning of the market of large institutions who purchase recently closed mortgages.  The institutional demand for closed, performing mortgages remains strong; and this has placed some downward pressure on mortgage interest rates for consumers.  This phenomenon has led some economists to expect mortgage interest rates to rise more slowly and less aggressively in 2023.  Moreover, many believe the Fed’s efforts to bring inflation under control are largely working and, if they are, the likelihood of continued increases in the Fed’s prime rate beyond mid-2023 seems smaller. 

 

Putting the above factors together and applying them to the Charlotte home market leads us to the opinion that values/prices are unlikely to fall significantly in our metropolitan area in 2023.  Demand for housing in Charlotte is very likely to remain strong.  Charlotte is currently the 8th fastest growing city in the U.S., with no signs of slowing growth.  If anything, the growth is accelerating, and this will continue to fuel demand.  The law of supply and demand, together with less of an increase in mortgage interest rates than many expected in 2023, will likely mute any downward pressure on property values in the area.  The days of low interest rates and low inventory causing increases in property values of 20% are gone for a while.  The market in 2023 is likely to be at least a bit more buyer-friendly.  But we do not expect any significant decreases in sale prices, much less any sort of bursting housing bubble.  The residential real estate market in the Charlotte metro area is likely to become more stable and healthy throughout 2023 in our view.