Amit Haller is the Co-Founder & CEO of Reali, a high-tech, high-touch real estate company founded in 2016.
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Anyone in the market to buy or sell a home knows the adage “location, location, location” determines value in a real estate sale. As with so much else in 2020, it’s clear this idea is being challenged. As the impact of Covid-19 puts pressure on everyone, many want to know if it’s a good time to buy or sell a home. Homebuilding is looking strong, which is one good sign. But as exciting as that news is to the real estate industry overall, there are still major challenges to overcome. To illustrate, I’ll replace “location, location, location” with “inventories, contingencies and financing.”
Inventories
New home construction sales saw a massive year-over-year jump of 43% in August. While some of that is likely due to pent-up demand from a reduction in activity in previous months, positive momentum carried over from July into August, where the number of homes for sale or sold was up 4.8%. A welcome trend is influencing new construction home sales.
The increase in new construction is improving the current real estate sticking point: inventory. We currently face a significant inventory shortage in many places, especially California. Even factoring in people leaving – 661,000 left in 2017 – there is still a shortage of more than 1.3 million homes in the Golden State. That’s just one, albeit huge, state. More recent data from Freddie Mac points out that the national housing deficit is between 2.5 and 3.3 million.
Contingencies
New construction is part of the overall solution to making the homebuying process smoother – unless you are trying to use an existing home sale to help with a home purchase. Existing home sales run into the dual problems of contingencies and financing, owing to the current and seemingly antiquated way residential real estate rules and regulations work. According to a 2019 report by Zillow, 64% of the 10,000 market participants surveyed sold and bought at the same time. However, people can’t always use the sale of their existing home to purchase new construction because it’s contingent on a set of actions that needs to happen, and contingencies don’t have to be accepted by a seller. It is an admittedly dissatisfying answer. Motivated sellers are also motivated buyers, so why put obstacles in their way?
The process of buying and selling a home at the same time can be confusing and expensive. Too often homeowners end up paying two mortgages at a time because it is too difficult to align the two transactions. Sellers often resort to placing an offer on a new home that’s contingent upon the sale of their current home, which might put them at a disadvantage in competitive environments where all-cash offers and those with fewer contingencies stand out to sellers.
Not many hardworking people are able to place a noncontingent offer if they need to sell their current home. Many end up moving in with family or friends or renting a home for some time before buying their next home, which means enduring the inconvenience of moving twice.
Financing
Financing options and buy-before-you-sell programs available to sellers offer some convenience and streamline the process by removing financial contingencies. A seller can essentially trade in their existing home for a new one based on the equity available in their current home.
So do qualifications in this scenario differ from one that is contingent upon a buyer first selling their current home? The biggest differentiator is that the buyer is preapproved and qualified on the payment of the new home instead of having to qualify and cover the cost of payments for both homes. Credit scores, overall loan-to-value ratios, cash reserves and down payment amounts are still taken into consideration, with credit scores for these programs ranging from 640 to over 800.
Bridge loans are one of the few existing loan types designed to help borrowers finance the purchase of a new home while they wait for their existing home to sell. However, they do require a high credit score, along with a specific debt-to-income ratio and possible fees. Bridge loan terms are usually between three and 18 months. The borrower may end up making larger monthly payments compared to other financing options.
New financing programs use technology platforms to help customers get into a new home while awaiting the sale of their original home. There are differences between these programs and bridge loans, including how customers qualify. With the new programs, a customer is first preapproved and qualified based on how much equity they have in their current home. Of course, qualifications vary based on the program.
For example, with the program my company built, the preapproval process takes a few days. After preapproval, the customer pays a deposit and then works with our in-house team to find and buy their next home with an all-cash, noncontingent offer. Once they move into their new home, they pay us rent while we prep the departed home and sell it. The rent is similar to payments on a bridge loan, but without the interest included in loan payments.
After the sale of the departed home, the customer uses the proceeds to buy their new home back at the original purchase price, regardless of market conditions. This way, the customer avoids paying two mortgages and moves only once – directly into the new home.
Moving only once is possible in both scenarios. However, there is always a risk of delays in selling that could see the homebuyer paying bridge loans or rent for longer than they would like. Bridge loan terms in the first scenario and a complete in-house team in the second are intended to mitigate the risk.
The rise in new construction is an exciting and welcome development in meeting the housing needs of many around the country. There are still obstacles to overcome, including contingencies and financing, but the use of longstanding and new options greatly increases buying power. Increased financing options allow more people to find the homes they want in these challenging times.
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