NUMBER OF FIRST TIME HOME BUYERS DECLINES; WHAT THIS MEANS FOR D.C., MARYLAND AND VIRGINIA HOMEOWNERS

The Wall Street Journal reported that despite the strong housing market this year, there has been a decrease in the number of first time home buyers.  In 2015, first time home buyers accounted for only 32 percent of all purchasers, a percentage that has been decreasing over the past three years.  This is the lowest level of first time home buyers since 1987.

A big factor in the decline has been the sharp increase in home prices.  Higher home prices mean higher down payments for first time home buyers, who are finding themselves cash strapped by higher monthly rents and student loan payments.  As these monthly payments increase, potential home owners are able to save less each month for a down payment on a home.  With higher down payments needed for higher priced homes, and monthly savings goals falling flat, it will take first time home buyers longer to enter the housing market.

Furthermore, as the Federal Reserve looks to raise interest rates this year, the cost for first time home buyers to purchase a home and carry their mortgage will only increase.

These trends could impact D.C., Maryland and Virginia homeowners in two potential ways.  First, it could cause home prices to decline.  Fewer first time home buyers will cause a ripple effect in the housing market which may lead to lower prices for all homeowners.  Second, it could also lead to more pressure to reduce lending standards and income requirements, moves that helped contribute to the nation's housing crisis and a tightening of lending standards.  As housing prices soared in the early-2000s, lenders had to become more creative so that their clients could afford to buy new homes.  At that point, among other programs, we saw the introduction of 100 percent financing, and interest only and negative amortization loans.

With substantially more government regulation over the industry today, I would not expect a loosening of lending standards and would predict that housing prices will hold steady or decline in the near term.  As a result, an already cool real estate market may become frosty over the winter if the number of first time home buyers continues to decline.

Bruce Stern, Esq. (with Keera Gilbert)
www.sternlegal.net
www.peninsulasettlements.com

View from the Street: Equilibrium Returns to the Real Estate Market

If you drive around Montgomery County these days, you will see something area residents have not seen in a while:  "For Sale" signs, and a lot more of them.  Whereas a few months ago, For Sale signs would go up and down in a heartbeat as homes quickly sold, often above the list price, now the signs remain up as houses sit on the market longer.  This is good news for those buyers who were priced out of the market in the Spring and Summer, and not so good for sellers who were expecting to receive full list price offers and who again have to deal with a changing market.  I'm sure the "Price Reduced" signs for those homes still on the market are not far behind.  

GETTING YOUR CONTRACT ACCEPTED IN A COMPETITIVE REAL ESTATE MARKET

As the Washington, D.C. real estate market continues its hot streak, and demand outpaces inventory, buyers need to know what it takes to get a seller to accept their offer in this competitive, multiple contract environment.   To get the answer to this question, I spoke to Long and Foster Super-Agent Ron Sitrin.  Ron, who is ranked in the top one percent of real estate agents nationwide and averages over $30 million in sales volume annually, gave the following advice to make your contract stand out in the eyes of a seller who is considering multiple offers.  Buyers and their agents should consider the following:

1. Be Price Competitive and Include an Escalation Clause:  For properties where you are expecting to be competing against multiple offers, consider making a full price offer with an escalation clause.  Nothing catches the eye of a seller who is reviewing multiple contracts like more money, although other factors may come into play in the seller’s ultimate decision.
2. Waive the Financing and Appraisal Contingencies.  Full price offers plus an escalation clause are great, but sellers want to be assured that you can close on the contract.  A contract $100,000.00 over the asking price is meaningless if you can’t close on it.  There are few things that provide more assurance to a seller that a deal will close than when a buyer is paying cash or is willing to waive the financing and appraisal contingencies.  But, before you agree to waive the financing and appraisal contingencies, make sure that you either have the cash necessary to close or your lender has clearly indicated that you will not have any problems obtaining a loan.  If you have waived the appraisal contingency, and the property does not appraise at the purchase price, you will likely need to bring more money to the table since your loan will be based on the appraised value of the property, not the sales price.
3. Increase the Size of the Earnest Money Deposit.  A large earnest money deposit will show sellers that you are committed to buying the property.  The average earnest money deposit ranges between three and five percent of the purchase price, so if your EMD is more than that, it will stand out to a seller.  Note, however, if you do not close on the transaction, you are at risk of losing the EMD depending upon the terms of the contract.
4. Shorten the Home Inspection Periods.  You may also want to consider shortening the period of time to conduct your home inspection.  Pre-arrange an inspection before submitting your contract or have an inspection completed before you submit the contract.  Inspection issues are one less contingency the seller would then need to be worried about.  You may also want to consider waiving the radon inspection as the maximum expense, even if there was a radon issue, is not substantial.
5. Offer a Free Rent Back.  If the seller need some additional time in the property, consider offering a free rent back or reduced cost rent back.  You may also want to determine when the seller is looking to close and pre-coordinate a settlement date to be included in your contract.
6. Consider Writing a Letter to the Seller.  A heart felt hand written letter attached to the contract about why the seller should sell you the house over other bidders may carry some weight   For many sellers, the house for sale may have been their home for many years, where their children were raised and the site of many important milestones in their lives and they may be interested in learning about who is looking to buy their home and why they want their property. 
7. Pick the Right Settlement Company.   Okay, this was not one of Ron’s suggestions, but the right settlement company can make a big difference in a contract.  Some settlement companies in Montgomery County charge the seller significant fees – I’ve seen charges up to $850.00 to the seller on a HUD-1 – but Peninsula Settlements does not.  Our flat fee to the seller is only $250.00 and includes everything that we need to do for the seller in the transaction.  We do not charge payoff or recording fees, power of attorney preparation, or courier or delivery fees.  Selecting the right settlement company can put up to $600.00 more dollars in the seller’s pocket, so make sure you list Peninsula Settlements as the settlement company on your next contract.

Please feel to contact me if you have any questions regarding this post or any real estate issue.  Good luck on getting your contract accepted!

 

Bruce Stern

301-444-4664

bruce@sternlegal.net

 

 

BREAKING UP IS HARD TO DO – WHEN THE BUYER’S BREACH RESULTS IN LOSS OF THE EARNEST MONEY DEPOSIT (OR MUCH MORE)

Few buyers enter into a real estate contract expecting that they will be unable to close on the purchase.  Sometimes, however, bad or unexpected things happen, the closing does not occur as planned and an upset seller will make a claim for the buyer’s earnest money deposit. 

Although most buyers believe that their monetary exposure in the event they breach the contract and fail to close on their purchase is limited to the amount of their earnest money deposit, this is not the case.  The GCAAR Regional Sales Contract provides that the seller may, at its option, accept the earnest money deposit as full and “liquidated damages” for the breach.  If this election is made, the seller will accept the deposit as full payment for its damages and the buyer will have no further liability to the seller.  However, a seller is not required to accept the deposit as liquidated damages and may pursue the buyer for all its damages, an amount that could substantially exceed the amount of the deposit.  For example, if an earnest money deposit was $5,000 and the seller incurred $10,000 in damages as a result of the buyer's  breach, the buyer could be liable for the whole $10,000, plus the seller’s attorneys’ fees (and his or her own attorney’s fees, as well).

A prudent buyer should consider amending the default provision of the real estate contract to provide that, in the event of a breach, the seller shall accept the earnest money deposit as its liquidated damages without exception.  Such an amendment would establish with certainty the maximum liability the buyer would face if he or she breached the contract and failed to close.  Otherwise, potential damages are unknown at the time of the contract and a buyer could face significant liability in the event of a breach.

If you have any questions regarding real estate contract issues, please feel free to contact me at (301) 444-4664 or via e-mail at bruce@sternlegal.net.

Bruce L. Stern, Esq.

Don't Skip the Survey

Many clients will ask their real estate agent if they need to obtain a survey in connection with their purchase of real property.  If the survey is not required by the purchaser's lender, or if the transaction is a cash deal, some realtors will tell their clients that they do not need a survey and to save the expense.  (Location surveys typically cost between $200.00 and $225.00 for a single family home on a lot less than an acre is size.)  This is a big mistake and, as a lawyer, I strongly recommend that all buyers obtain a location survey of the property they are purchasing - regardless of whether a survey is required by the lender - so that the buyer is aware of any title issues that may be disclosed by the survey.

The survey - which is essentially a map of the property and shows, among other things, where the house, buildings and fences are constructed with respect to the property line - can alert a buyer to potential problems regarding the property under contract that would not otherwise be disclosed by a title search.  For example, my office did a closing last year where the survey showed that the driveway for the property was actually constructed over the next door neighbor's land.  No easement providing the property owner with access over the neighbor's land had ever been recorded and the property being purchased was essentially landlocked.  This fact would never had been discovered had a survey not been ordered by the buyer.  Similarly, we recently conducted a closing on a property where the buyers thought they were getting a large, fenced in backyard.  The survey, however, revealed that the fenced in yard actually contained a large portion of land that belonged to the next door neighbor.  Again, this would have gone undetected if no survey had been ordered. 

Buyers who fail to purchase a survey are also not protected by title insurance which has a specific exception to coverage for issues that would have been disclosed by an accurate survey of the property.

The lesson of this blog post is simple.  When your clients are spending several hundreds of thousands of dollars (or more) purchasing a house, they should not spare the nominal $200.00 expense of a survey.

If you have any questions regarding a real estate matter, feel free to call me at (301) 444-4664 or send me an e-mail at bruce@sternlegal.net.