The Most HILARIOUS real estate advice from a San Mateo broker
I caught this little gem called How to Buy the Home You Want Without Insulting the Seller from Trulia. This was written by a Burlingame based mortgage broker about five months ago. Here are some highlights of this article.
“Let’s face it – most of us would like to buy more home than we can afford.”
This is how the article opens up. Really? Is that really true for most of us? Or is it just true for those who can’t really do math?
Next it goes on:
Suppose you see a house that you really like that is listed for sale for $800,000. You are going to make a 20% down payment. You want to offer $775,000.
….
You are worried that the seller is not going to accept this reduced price offer, and you certainly don’t want to insult them, because you truly want the house. So you decide to use the seller paid buydown strategy.
Lets do the math here. 775k on a 800k home is 96.9% of the listing price. In San Mateo/Burlingame/Belmont the average sale to list ratio is about 96% to 98% so I would say that 775k is a VERY reasonable offer, and I highly doubt that it would insult a seller. Seriously, some of the troubled sellers would be ecstatic to get such an offer.
Next this broker reveals the strategy he is proposing.
Instead of offering $775,000, you make a full price offer of $800,000, and you ask the seller to credit $25,000 toward your closing costs.
What do you do with this $25,000 credit? You buy the interest rate down to 4.25% by paying almost 4 points, for example.
By buying the rate down to 4.25%, your monthly payment has been reduced to $3149 per month. The property taxes are slightly higher, $733 per month. The down payment is $5000 more. But look at the impact this strategy has – a monthly savings of $397 per month!
Now, here is the icing on the cake – although the seller made a contribution to buy your rate down, you get the tax deduction for the $25,000 in points paid all in the year that you purchase (check with your tax preparer to verify)!
Wow! A savings of $397 per month!!! Guess how much money you just let the bank earn here. $25,000 on the 4 points upfront, and 30 years of interest on an extra $20000 of principal. Of course, a bigger loan is better for the mortgage broker if they are taking a fee from this. So this is very good for the broker, but not necessary great for the consumer. Seriously, who in their right mind does a 4 point buy down? It is much cheaper to offer the lower price, and then pay 1 point or less to do a refinance later if interest rates come down.
The bottom line is that I don’t think buyers should be worried that they will be insulting a seller with an offer lower than the listing price. I think everyone should always offer what you are comfortable with and what you can afford. If your offer isn’t accepted then just move on. In the example given by this broker, if an offer of $678,500 were accepted then that would also lower monthly mortgage by more than $400, and the buyer would save around 25k in downpayment. It is not like we haven’t seen homes drop more than $120k from their original listing prices here.
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Less the 4 points will be insulting to a mortgage broker.
I wrote this blog. Maybe a seller won’t be insulted by getting an offer at 97% of the asking price. However, I stand behind the strategy. If you do the math, 4.25% interest on $20,000 over 30 years is $25,500. Saving $397 per month over 30 years is $142,920.
As a mortgage broker, we usually get paid 1% of the loan amount. 1% of $20,000 is $200. After our split, that’s around $150 – hardly a financial motivation to suggest this strategy.
My motivation for writing this article was to educate home buyers and home sellers on a different strategy to get what they want. Should I have worded the “insulting the seller” part differently – maybe. But the strategy is sound if you do the math.
Phil