Good buys need smart prep
We have been cautious in our optimism at the Voice, so we sat down with four of the beach’s most knowledgeable Realtors.
Richard Hess, vice president of sales at Sun Realty; Pamela Smith, vice president of sales at Coldwell Banker/Seaside Realty; David Perrot, owner and broker at RE/MAX Ocean Realty; and Danny Couch of Hatteras Realty joined us at the Outer Banks Association of Realtors headquarters to discuss the state of the market.
Research tells us that prices for OBX real estate now make sense, and interest rates are at historic lows. But as a former banker, I expected a tsunami of criticism on the lack of loan products for qualified borrowers, based on anecdotal reports in the national press.
While frustration with the process was evident, the word from this panel of experts is simple: You can own an Outer Banks home at unheard-of low prices and interest rates.
Just expect a lot of documentation, and don’t come to play unless you are armed with good credit, verifiable income, cash down payments and most important, a local mortgage lender who has pre-qualified you before your search begins.
We’ll start with the only negatives expressed by the group. Loans can be made, but the process is slow and frustrating, requiring lots of documentation — sometimes repeatedly.Hess kicked things off by noting the rates advertised by lenders are for “perfect” risk candidates with credit scores above 750, liquid assets, verifiable income, down-payment funds and low debt-to-income ratios.
But those with “average” scores, Hess says, can still get loans. You may have to pay a higher rate or more points, but if your debts are in line and lenders can document your loan, there is light at the end of the (long) tunnel.
For smaller loans, such as those for west-side permanent residences, all the Realtors noted a sharp increase in the use of FHA and VA loans. While these loans require minimal down payments, Hess noted many borrowers are putting down more than required to enhance their loan applications.When I asked the group how many qualified buyers actually lose their loans from stubborn lenders, the groups estimated 20 percent or less.
Smith and Perrot added that the 20 percent estimate was about the same as it was before the housing boom, when lenders tossed money at any borrower with a pulse.
In their opinion, what we are seeing now in the lending market is “normal” if one takes a longer backward look into the market.
So where are the problems?
The entire panel placed their frustration with the process itself.
• High credit scores mean better rates, but average credit scores (in the 650 range) do not mean you cannot obtain a loan. You may pay a higher rate, more points, or more down payment, but you can get the loan.
• Be prepared to supply lots and lots of documentation — tax returns, pay stubs, bank statements. Be ready to explain large withdrawals or deposits on your statements.
• If the loan process drags on, be ready to re-supply more pay stubs and updated information.
• If your accountant has a sharp pencil and you show no income, don’t waste your time.
• For investment homes, 20 percent down is required. For jumbo loans, 30 percent down is the norm.
• Most lenders no longer count projected rental income for qualifying on rental homes. Be prepared to qualify based on your own household income.
• Prequalify with a local mortgage lender before you even start looking.
• And the most important of all. In a unanimous decision: “Use a local mortgage loan lender. Never, ever, ever use your local hometown bank, even if it is in Hampton Roads. And, as Couch noted “I don’t care if your brother is on the board of your local bank, the out-of-town bank will screw the deal up. If your Realtor recommends a local lender, use them.
• Listen to your Realtor and your mortgage loan officer, they are the experts.
“We sell fun here, and buying a home on the Outer Banks is supposed to be fun,” Perrot said.
A smooth process, in which knowledgeable lenders and Realtors combine to create a pleasant buying experience, is what Realtors and buyers expect.
Instead, Perrot describes the journey from application to closing as something akin to “jumping hurdles blindfolded . . . you know one is coming, but you don’t know where.”
In the past, Smith noted, “one never heard a mortgage originator use the word ‘underwriter’ ” — the folks who take the documents gathered by the originator and vet them for accuracy and conformity so they can be sold to secondary market investors after the loan is closed.
Now, originators commonly cite problems with the “underwriter” once the loan leaves their office and is submitted for approval.
The panel said many underwriters lack knowledge of this area and become confused about rental homes, condo projects, self-employed borrowers and the fact our land values can comprise 50 percent of the sales price — causing issues down the road when obtaining insurance.
Hess and Couch said the primary issue was timing.
Many of the issues raised by underwriters — more income information, questionable appraisals, asking for more information — could have been corrected earlier in the process, yet often crop up late in the game — sometimes the day before closing.
For Realtors, who rely on happy clients to make referrals, all of this extra “anxiety and frustration” is unnecessary and takes from the close relationships Realtors try to cultivate with their clients.
If things go wrong, it’s the Realtor, not the lender, who bears the brunt of the buyer’s frustration and badmouthing.
Now, the good news
Realtors are, by nature, optimistic people. And they have found an answer to their problems — a surprising one at that.
When the mortgage crisis reared its head, regulators went after so-called mortgage brokers, who they felt had ginned up bad loans since they were not directly supervised by their employers the way bank and mortgage company lenders were.
But now, brokers and mortgage loan originators working for smaller mortgage companies are coming into favor with the real estate sales crowd.
All four members of our panel said most of the horror stories have come from commercial bank mortgage lenders — national and community banks alike.
Beat up by regulators, afraid of taking more risk under the watchful eye of auditors and sporting distant and cumbersome bureaucracies in the underwriting area, commercial banks appear overly cautious and gun shy where mortgages are concerned.
Another problem is commercial banks own their own appraisal management companies (AMCs) and often assign appraisers for OBX properties from Raleigh, Greensboro and other distant areas.
The appraisers don’t know the area, choose poor “comps” and can “blow up a loan” quite easily.
The local brokers and mortgage companies, according to Hess and Perrot, have found ways to work with experienced underwriters who know the region, and their pool of appraisers is generally filled with more local professionals who know the market.
Plus, as Couch noted, if a mortgage broker or lender doesn’t work the loan with the underwriter, “they don’t get paid.”
The criteria make it far more difficult for any broker to falsify loan documents, so the bad originators have gone the way of the dodo, but good brokers want those deals to close so they can collect their paychecks.
The good originators take time to pre-qualify borrowers, gather documents early and even eliminate unqualified borrowers early in the process — before the loan goes to underwriters and days turn into weeks and then disappointment all around when the loan is declined.
Each of the sales folks had a group of broker and lender resources they use, and all felt that qualified borrowers can get loans for just about anything — primary residences, second homes and even investment homes, if the right lender and borrower are put together.
It’s better now
Pamela Smith sounded a theme that summed up much of the reasons buying homes and obtaining loans is not the nightmare some have made it out to be.
“Borrowers are better educated,” she said. “They have done their homework, they know what it takes to qualify and they know what a house is worth. Realtors are better educated also — preparing the client for the more strenuous loan process and getting back to prequalifying. The financial crisis actually has improved the situation.”
Hess agreed, and he said those looking know what they want and what it’s worth. All the Realtors said if borrowers really want a house and are convinced of the value, they put more money down to avoid loan hassles.
Smith noted that as much as 35 percent of her sales are cash these days, with no borrowing involved. And cash sales create comps for those who do borrow.
Smith says she is now seeing properties netting multiple offers from buyers, something newer agents have never experienced.
“One week, an agent came to me and said, ‘you aren’t going to believe it, but I have a question on how to handle a multiple offer.’ ”
Smith said it was her firm’s third multiple offer that week.
Couch and Hess said price appreciation locally is now a reality, and they both noted Florida started the trend. As Couch says, “I am working seven days a week now.”
Unlike Florida, or many other coastal areas, Perrot preaches the value of the Outer Banks.
“No one can match our lifestyle. People want to own here, sometimes buying the same house their parents and grandparents brought them to. And no one can match the length of our rental season.”
Hess chimes in, “I tell buyers to show me an investment where the price has decreased 40 percent or more, but the cash flow from rents has stayed the same or even increased over the same time period.”
Indeed, while local prices plummeted, some say too far in the aftermath of the 2005 crash, rents hardly missed a beat and are actually starting to rise.
Perrot notes that the market has absorbed the surplus of “spec rentals” and in many cases, people are buying smaller rental properties and keeping them as second homes, “shrinking the rental base and shoring up rents.”
The cash flow for an investment house makes far more sense in 2012 than it did in 2006 given the historically low list prices and interest rates.
Smith noted that over the past three years, sales have improved each year and prices have stabilized.
She gave me a friendly admonishment when I opined the market may not be coming back, “Given those facts, I have to disagree.”
See what people are saying:
Join the discussion:
You must be registered and logged in to post a comment.