Unlock the Secrets: Real Estate Agent-Endorsed Mortgage Strategies to Snag Your Next Property on a Budget!
Purchasing a home requires a collaborative effort, and this is particularly evident given the current affordability challenges buyers face. With fluctuating interest rates and fierce competition for scarce properties, home buyers are confronting distinct challenges. If you find yourself making multiple, even overpriced offers, with no success, it might be the moment to rethink your approach and consult with an expert real estate agent.
Specific mortgage strategies and incentives for sellers can aid buyers, even when they’re up against cash purchasers or those proposing above the asking price, notes Elias Medina, the principal broker and owner of Medina Real Estate Inc. affiliated with Keller Williams Real Estate in Albuquerque, New Mexico.
In our discussion with Medina, a Zillow Premier Agent affiliate with over two decades in the sector, and one of his recent associate brokers, Linda Rasheed, they shared various strategies they have employed to assist their clientele. We also get a chance to pick the brain of the founder and CEO of Chiles Capital, a brokerage that specializes in real estate investment financing.
While their approaches might not be universally applicable, they present potential buyers with insights into modifications in their bids or financial plans that could be the tipping point between acquiring a property and continuing their search.
At Chiles Capital, we specialize in crafting real estate solutions designed for real estate investors. Being a niche brokerage with a focus on innovative finance options, we guarantee individualized services, prompt feedback, and financial structures that outperform conventional lenders. We don’t just finance; we’re collaborators in propelling your business forward.
1. Consider Opting for a Limited Appraisal Contingency
An appraisal gauges the present value of a property and helps lenders decide how much they can lend for a particular house. Typically, buyers making an offer include an appraisal contingency. This allows them to withdraw from the transaction without any penalties if the appraisal doesn’t match the agreed price.
In highly competitive markets, there’s an inclination among buyers to forgo the appraisal. However, this might compel them to cover any discrepancy at closing if the offered price exceeds the appraised value. This discrepancy arises because the loan amount is determined by the appraisal value. Any excess must be addressed by the buyer upfront.
Medina suggests a balanced approach. Instead of completely eliminating the appraisal, some buyers are willing to pay a predefined amount above the selling price if the appraised value doesn’t meet the asking price. This approach lets the buyer remain competitive with their offer without the potential strain of paying a substantial amount upfront or risking their earnest money.
2. Demonstrate Commitment with a “Time Off Market” (TOM) Fee
In markets where buyers frequently face challenges securing a property due to competitors offering above the asking price, there exists an alternative that may be equally appealing to sellers, and perhaps even more cost-effective: introducing the Time Off Market (TOM) fee.
Usually, when buyers place an offer, they deposit earnest money— a refundable amount subject to certain conditions. However, the TOM fee operates differently; the seller retains this amount irrespective of the transaction’s outcome. As Medina elucidates, “The fee is essentially a commitment for the seller to prioritize the buyer’s offer. It’s an assertive approach with proven efficacy. Even if the sale doesn’t conclude, the buyer is still accountable for the fee.”
Replacing earnest money with a TOM fee might appeal more to sellers than just an increased offer price. Especially when there’s a likelihood of an appraisal gap, where the selling price surpasses the value determined by an appraiser. As an illustration, Medina recalls a negotiation where a rival bid was approximately $10,000 above the list price. Instead of merely matching this, Medina contended that the property was judiciously priced in line with comparable sales. Any bid exceeding this, he argued, would likely produce an appraisal gap, putting the deal in jeopardy.
“I proposed the list price complemented by a $5,000 TOM fee, sidestepping potential appraisal concerns,” says Medina. He dubs this “a proactive move” because, while the buyer pays a premium, they assume the transactional risks. Yet, such a competitive bid can be more enticing for the seller and economical for the buyer than simply exceeding the asking price by $10,000.
The magnitude of the TOM fee is variable, often contingent on the property’s price, but Chiles has seen it range between $500 and $5,000 and loves Medina’s straightforward approach.
“It’s crucial for the buyer to fully grasp the TOM fee’s concept, be entirely at ease with it, and be genuinely committed to that property. Otherwise, they must be prepared to forfeit the TOM fee should the purchase not materialize,” Chiles cautions.
3. Consider Purchasing “Mortgage Points” for a Better Interest Rate
Ever thought about buying “mortgage points” to snag a better interest rate on your home loan? It’s like making an upfront payment to your lender in return for lower monthly payments down the road. Think of it as investing in a discount for your mortgage. Generally, one point costs about 1% of your loan’s total amount. So, the more you invest in points, the sweeter the interest rate you’ll get.
Here’s a quick example: Let’s say you’re going for a $300,000 mortgage and decide to buy one point. You’d pay an upfront cost of $3,000 (which is 1% of $300,000). In return, you might see a 0.25% reduction in your interest rate.
However, before diving in, give some thought to how long you plan to live in the house, how much you’ll save monthly with that lower rate, and if you’re comfortable with the initial expense. If you’re scratching your head, no worries! Chat with a loan officer or financial guru to figure out if this strategy is a win for you. Better yet you can chat with both at the same time at Chiles Capital. Schedule a free consultation today.
4. Fancy a Temporary Dip in Your Interest Rate? Here’s How.
Looking for a savvy move to reduce your monthly mortgage payments? How about shaving off some of that interest rate, at least for a little while? The trick lies in securing a rate reduction for the initial one to three years of your mortgage.
Ever heard of a 2/1 buydown? It’s pretty nifty. Essentially, this mechanism lets you “purchase” a lowered interest rate for the first two years of your mortgage journey. Picture this: You opt for a 30-year fixed rate mortgage at 7%. With a 2/1 buydown, you could potentially slide into a cozy 5% rate for the first year and then a 6% rate in the second, all by fronting some of the interest that you’d typically shell out at the 7% rate. Come year three, it hops back to 7%.
Now, keep in mind, the fee for this buydown magic isn’t bundled with your other closing costs. Whether the seller, the builder, or you cover it is up for negotiation. Most folks who play the 2/1 buydown card are either crossing their fingers for a dip in interest rates (hello, refinance opportunity!) or they’re expecting their earnings to shoot up while they’re enjoying that initial reduced rate.
Feeling a tad overwhelmed? Don’t fret! Your friendly neighborhood loan officer is a wellspring of knowledge on 2/1 buydowns. They can break down the costs and fine-tune the details, ensuring you’re well-equipped for your mortgage journey.
5. Increase the Offer Price with an Eye on a Seller-Financed Rate Reduction
An intriguing negotiation strategy is to raise the offer price, then have the seller reimburse the added amount. This effectively enables the buyer to secure a reduced mortgage rate from their lender upon closing. This approach is particularly potent when dealing with a seller whose property has lingered on the market or when the buying climate is in the purchaser’s favor.
To provide some context, Medina recounts a recent transaction:
He advised his client to present an offer that exceeded the listing price by approximately $8,000. The catch? Request the seller to return this surplus to empower the buyer to attain a diminished interest rate from their lender. Essentially, the buyer enhances the loan quantum, eliminating the necessity for an immediate outlay to capture the reduced rate. This maneuver results in a more favorable monthly installment, allowing the buyer to distribute the buydown’s expense throughout the loan’s tenure.
Medina underscores the associated appraisal risk with this approach, “The property must match the escalated valuation. But if these funds are effectively channeled towards a 2/1 buydown or a direct rate reduction, the monthly dues can be substantially alleviated.”
While a 2/1 buydown provisionally eases the mortgage obligation for a duo of years, acquiring points diminishes payments for the entirety of the loan’s term.
Thanks to this strategy, Medina’s client achieved a 1.5 percentage point reduction in their mortgage rate. Consequently, they secured a more advantageous monthly payment than they would have, had they adhered strictly to the original listing price without benefitting from the slashed interest.
6. Explore the Option of a Lender Credit to Reduce the Mortgage Rate
Chiles emphasizes the significance of maintaining strong professional associations in the realm of real estate. Agents with established ties to lender partners are often better equipped to assist buyers in crafting superior, competitive offers in closely contested situations.
Although some of these strategies might appear complex on the surface, a seasoned agent in conjunction with a knowledgeable loan officer can identify the best options for you. Buyers keen on examining diverse financial scenarios can utilize tools such as Zillow’s affordability calculator to facilitate their decisions
7. Dive into the World of New Construction
Opting for new construction may not traditionally be seen as a competitive offer strategy, yet it presents an opportunity for more favorable mortgage rates, observes Chiles. An added advantage is that, in specific markets, buyers face reduced competition. This allows them to bypass aggressive bidding wars, and have the delight of owning a pristine, untouched home.
“Many builders extend attractive incentives when utilizing their in-house financing solutions,” Chiles points out. He recalls a recent instance where the interest on financing stood at 4.99% — a rate approximately 2% more competitive than prevalent rates for 30-year mortgages.
Furthermore, Chiles notes that while builders might remain steadfast on the listed price — to maintain consistent pricing benchmarks across their developments — they often exhibit flexibility when it comes to concessions and financing terms.
Regardless of whether you’re actively scaling your real estate portfolio or simply entertaining the idea, acquainting yourself with strategies to thrive in a seller-dominated market can prove invaluable. As you navigate this landscape, always remember to engage with your real estate agent for the most accurate insights. It’s essential to comprehend that every strategic move involves its set of risks. Buyers should be acutely aware of the potential implications and understand how these strategies align with their broader home-buying goals.