The past year’s red-hot residential real estate market, with its seemingly ever-increasing prices and razor-thin inventories, has led many buyers to consider whether a newly built home may be just the solution. For some families, this alternative may make perfect sense. Here are some factors to consider.

The supply of newly built houses on the market in the DMV does seem to be more buyer friendly. The “absorption rate” (the ratio of homes on the market to contracts being written) for existing houses is less than two months; for newly built homes the rate may be closer to six months. The looser supply means substantially more bargaining power, and potentially less chance of getting caught up in a bidding war, for a newly built home.

Builders sometimes also offer incentives to use a particular lender or settlement company — although an experienced Realtor will counsel you to shop among multiple lenders for the best rate.

Newly built homes are often more energy-efficient and require less maintenance, which can certainly result in substantial cost savings over time. A new build also usually comes with warranties on workmanship and materials like windows, roofs, appliances and HVAC systems. Some builders even offer extended warranties. Of course, warranties are generally available through third parties for existing homes as well.

The non-financial factors are more of a mixed bag. New subdivisions tend to be located farther from city centers, which can result in longer commutes and less ready access to urban amenities such as restaurants, museums and concerts. Existing homes will usually be in more established neighborhoods with more mature landscaping.

On the other hand, a newly built home may afford more customization options to fit your tastes and preferences, such as cabinets, flooring, backsplashes and paint colors. (Often, the best prices come from selecting one of the builder’s “design boards,” because the builder can negotiate supplier discounts for those options.) A buyer can also select custom options geared to help him or her “age in place.” Finally, many new subdivisions offer community features such as pools and clubhouses.

Timing can also be a major consideration. For an existing home, a transaction can move very quickly indeed. Once your offer is accepted by the seller, the closing and move-in date can often be within a month to six weeks. New builds can take significantly longer to be ready for move in. Depending on the stage of construction, and the completion and closing dates, it could well be six months to a year down the road, and, depending on supply chain issues, further delays could come up.

Moreover, new builds are also subject to comprehensive permitting requirements and inspections, which can result in further delays. During all that time, inflation could be causing construction materials prices to increase, and interest rates could be rising.  Recently some builders have actually stopped pre-selling their homes because of the current uncertainty regarding costs and completion time.

Whether to add newly built homes to your search is a deeply individualized decision based on a number of financial considerations and personal preferences. Whether you are solely in the market for an existing home or a new build, an experienced Realtor can help you weigh the options and find the home and neighborhood that’s right for you.

Jean Beatty is a licensed real estate agent in VA, MD, and DC with McEnearney Associates Realtors® in McLean, VA. If you would like more information on selling or buying in today’s complex market, contact Jean at 301-641-4149 or visit her website JeanBeatty.com.

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In April, Part 1 of our series on Mortgage Financing in a Competitive Market looked at preparing to make an offer. This month we discuss how to make your offer without a home sale contingency.

You may have heard the real estate market is starting to slow down. Recent sales data seem to support that notion. You should keep in mind, however, that slowing down does not mean a slow market. It means the frenetic pace at which residential real estate has been sold over the past several years is a little less frenetic now. Interest rates have risen significantly which does have a chilling effect on home buying. Consumer sentiment over the economy has turned sour and that has a negative impact on home sales as well. But the most important factor driving the current home sales market is the demand for housing relative to the supply. Demand continues to outpace supply which generally means there is more than one prospective buyer for every home available for sale. Many, if not most homes listed for sale are still likely to receive more than one offer, which means if you want to be successful, your offer needs to be more attractive than the other(s).

One aspect of a contract which may be less attractive to a seller is a home sale contingency. If you choose to or must sell your home before buying the next property, the seller may accept an offer from another prospective purchaser with no such contingency. Some purchasers have both the income and the liquid assets necessary to be able to purchase the next home without first selling the existing home, but many do not. Determining which category you fall into requires a conversation with an experienced and competent mortgage professional as part of the preliminary approval process. You should also know that many mortgage loan officers will suggest that a person cannot purchase without first selling because the mortgage company does not offer bridge financing, or the loan officer is not aware of methods of generating the cash required to complete a purchase. It is truly in a purchaser’s best interest to make sure they are speaking with the right mortgage professional.

If you have the income required to carry the debt structure on two homes at once, there are multiple ways of generating the cash required to cover the down payment and closing costs on the next home. A traditional bridge loan secured by the property to be sold is one way to make it happen. Unfortunately, most mortgage lenders do not offer bridge financing. Some of us do, so make sure you are speaking with the right mortgage professional. A traditional bridge loan is secured by the property which will be sold and, by definition, is a temporary loan which will be paid in full upon the sale of the current home. The bridge loan usually takes out any mortgage which already exists on the property and will generally not exceed a loan-to-value of 70-80%.

An alternative to a bridge loan is a home equity line of credit (HELOC) secured by the current home. It is a good idea to have in place the largest HELOC possible on your current home to allow you to quickly access the equity for all eventualities. A HELOC can be used for emergencies, for investment opportunities, or to make the down payment on the next home without first selling the existing home. Unfortunately, if you have already found the next home it is too late to begin the process of establishing a HELOC. It generally takes most depository institutions 45 days to approve a HELOC and they won’t do so for a home which is to be sold or to be converted to a rental property.

Another common means of generating cash for a home purchase is to borrow against retirement plans. Most qualified retirement plans allow the plan participants to borrow funds for the purchase of a primary residence. The IRS allows plan participants to borrow up to 50% of the vested balance in the plan with a maximum loan of $50,000. A two-person household where both people are employed and have active retirement account balances in excess of $100,000 can generate $100,000 in retirement loans together to be used for the down payment on the next home. Retirement account loans are usually offered at very attractive interest rates and do not count as a debt when underwriting the mortgage for the next home.  Retirement account loans are not distributions and do not have a tax consequence. 

Gifts from family members are a common way of generating the cash for the next purchase. If a family member is able and willing to help but does not wish to provide an outright gift, they can be the source of a “bridge” loan secured by the existing home or even a subordinate mortgage on the new home.

The long and the short of it is there may be multiple ways to assist a homebuyer in generating the funds needed to purchase the next home without first selling the existing home. You simply need to explore the possible options with the right mortgage professional.

Brian Bonnet | Senior Loan Office
Atlantic Coast Mortgage, LLC
e: bbonnet@acmllc.com | t: 703-766-6702

A lifelong resident of Northern Virginia, Brian brings twenty-five years of lending experience to the group. After graduating from The Citadel and serving as a Naval Officer, Brian transitioned to the United States Senate Veteran’s Affairs Committee where he served as a Professional Staff Member and had the responsibility of overseeing the VA Loan Guaranty program.  After leaving Capitol Hill and the political world, Brian entered the mortgage banking industry. Keeping abreast of the myriad changes in the lending industry over the years has given Brian a unique perspective and the ability to successfully serve his clients regardless of the current market conditions. With his extensive knowledge about the VA and its loan guaranty program, Brian is widely recognized as a specialist in VA financing.  He enjoys sharing his knowledge and experience with others and is certified to teach Financing Continuing Education in Virginia, DC, and Maryland.

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For the last 24 months, the DC region’s real estate market has been the hottest we’ve seen in our 42 years in business. Fueled by record-low interest rates and record-low inventory, empowered buyers were chasing the relatively few homes on the market, driving prices higher. It was an incredible time to be a seller, a perhaps frustrating time for buyers — and it couldn’t last forever.

Rapidly rising mortgage rates combined with higher home prices mean that homes are roughly 30% less affordable today than this time last year, and it is clearly having an impact on contract activity. This means that sellers will have to adjust their expectations a bit, as there will simply be fewer buyers — especially first-time buyers who are most affected by higher rates. There won’t be as many multiple offers and homes will likely stay on the market longer. There still isn’t enough supply to meet even this lower demand, and it may take as long as another two years to get to a true balance between supply and demand. The important thing to remember is that this re-balancing in no way should cause worry about a crash. We’re talking about slowing price growth to normal levels of 3% – 5%.

30-year fixed mortgage interest rates have jumped two full percentage points in the last four months, from 3% to more than 5%, and that undoubtedly puts a pinch on homebuyers in what is still a very competitive sellers’ market. But as surprising and as swift as that rise has been, bear in mind that the average rate over the last 32 years is 6% – and it has been as high as 10.5% during that period of time.

The decision to purchase a home is personal, and shouldn’t be based on trying to “time” the market. Buy when you’re ready to buy. We know there is concern that rising rates will bring home prices down, and while it is absolutely true that buying activity will lessen because of higher rates, the biggest challenge in the market is the lack of inventory, not the lack of buyers. This spring, most of the region had less than a half-month supply – and we usually think of 3-to-6 months’ supply as balanced. Don’t defer a purchase decision because you’re waiting for prices to come down. The pace of rising home prices will ease in the face of lower demand, but they will still rise.

Your choice of an experienced Realtor and Loan Officer are key to navigating the changing market. If you are ready to buy or sell a home, reach out to a McEnearney Associate today for exceptional service. We are the trusted real estate resource throughout the DC metro area.

 David Howell, Executive Vice President and Chief Information Officer, of McEnearney Associates Realtors®

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Anyone who has been thinking about purchasing a home within the past year has heard over and over how competitive the marketplace is. The severe lack of residential inventory has affected all price points and all types of properties. Rising interest rates may cause some purchasers to exit the process, but the need for housing will have a greater impact on the continued supply/demand equation. 

Price and net proceeds are obviously important factors in the seller’s decision-making process, but several other factors related to financing can make the difference between a prospective purchaser being successful or having to find another home and write another contract. As a purchaser there are several things you can do related to financing which can make you more attractive to sellers.

First, you must be preliminarily approved for your financing. Your offer will not be considered without that preliminary approval. Additionally, you should choose a local lender. Seasoned listing agents have all had transactions which settled late or did not happen at all because a big-box lender or Skippy’s mortgage.com failed. They may get the job done 90% of the time, but that means they do not 10% of the time. Local lenders and their reputations are often known to the listing agent and local lenders will use locally-based appraisers. Local appraisers tend to know the nuances of neighborhoods and are more likely to generate quality appraisals. With multiple offers on the table, listing agents are likely to recommend to the seller that they ratify the contract which proposes financing through a local lender.

Next, talk with your lender about whether you can waive your financing and appraisal contingencies. It is not wise for some purchasers to waive the financing contingency, but other purchasers are virtually assured of loan approval, as long as they don’t walk in and tell their bosses to pound sand. Have a frank conversation with your lender about the risk (or lack thereof) of waiving the financing contingency. Many contracts are ratified with no financing contingency. Regarding waiving the appraisal contingency, it comes down to the purchaser’s ability to finance at a higher loan-to-value or their willingness and ability to come up with additional down payment funds if the property does not appraise at the contract sales price.  Again, a conversation with the lender is critical, and again most contracts in our market are currently being ratified without appraisal contingencies. 

Get your lender all the supporting documentation they will need to make the final underwriting decision before you start looking for property. You will likely need to update some of the documents, but you want to be ready to settle very quickly after contract ratification. You want a preliminary approval with loan specifics which line up with your offer. A vague “pre-qualification” does not put you in the best position. Not all sellers will want to settle quickly, but you don’t know which one’s will want to settle quickly, and you don’t want to lose to another prospective purchaser who proposes to do so. Generally, sellers want their funds as soon as possible and the best lenders can settle in three weeks or less from the time of ratification. Proposing a quick settlement may make yours the winning offer. 

In the next installment we will address ways to purchase the next home before selling the current home.

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Brian Bonnet | Senior Loan Officer
Atlantic Coast Mortgage, LLC
e: bbonnet@acmllc.com | t: 703-766-6702

A lifelong resident of Northern Virginia, Brian brings twenty-five years of lending experience to the group. After graduating from The Citadel and serving as a Naval Officer, Brian transitioned to the United States Senate Veteran’s Affairs Committee where he served as a Professional Staff Member and had the responsibility of overseeing the VA Loan Guaranty program.  After leaving Capitol Hill and the political world, Brian entered the mortgage banking industry. Keeping abreast of the myriad changes in the lending industry over the years has given Brian a unique perspective and the ability to successfully serve his clients regardless of the current market conditions. With his extensive knowledge about the VA and its loan guaranty program, Brian is widely recognized as a specialist in VA financing.  He enjoys sharing his knowledge and experience with others and is certified to teach Financing Continuing Education in Virginia, DC, and Maryland.

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One of the most misunderstood aspects of residential real estate involves cooperatives. Most members of the public, and honestly many real estate agents, do not truly understand what a cooperative is and how it differs from a condominium or a traditional fee simple property.

Let’s start with talking about what a cooperative actually is and how it is different from other property types. When you purchase a condominium you are buying real property (the specific unit) and an ownership share in the common elements of the building. Your specific unit will come with its own tax identification number and your ownership share in the common elements will be based on the overall size of your unit. When you purchase a cooperative, you are technically not buying real property but rather shares of stock in a corporation. The unit that you are purchasing and your ownership share in the common elements is given to you in the form of stock in the corporation. A cooperative does not have individual tax identification numbers for each unit and in fact property taxes are handled differently which is something we will talk about a little later on. 

Throughout my career I have sold dozens of cooperatives to my buyer clients and listed just as many for my sellers, and the same myths about them would come up each and every time.  Educating clients on the pros and cons of buying a cooperative became an important part of the process. So, let’s discuss some of the common myths about cooperatives.

Myth #1 – The monthly fees are always higher.  

Well this is typically true but there is a very good reason for it. As we discussed earlier, cooperatives do not have individual tax identification numbers. Because of this, the building receives one tax bill for the entire property and that bill is divided up among the unit owners which could be lower than a similar condominium. The tax amount each owner will pay is based on their ownership share and that amount is part of the monthly fee. So while the payments are typically higher with a cooperative it is because your property taxes are included.  

Myth #2 – There are not many coops left in our area. 

While it is true that very few of the new buildings are cooperatives, there are still many remaining in our area, especially in Washington, DC. While we may not have as many as a place like New York City, the first co-ops started here in the early 1920s and have a solid presence in our region. If you have ever looked at units in the city, especially in Northwest DC, odds are you came across a cooperative in your search. While there are some co-ops in Maryland and Virginia, they are few and far between. 

Myth #3 – When it comes to resale, cooperatives are harder to sell.

I can understand why someone might think that however there is no statistical data to back up this claim. Co-ops certainly have additional steps to go through in the buying process but how fast they sell are typically in line with similar condominiums. 

Myth #4 – It’s more difficult to get a loan for a cooperative.

Most cooperatives do have preferred lenders (recognition agreement) that they require a prospective purchaser to use for any type of financing and some do have a minimum down payment requirement. It’s important to ask the listing agent which lenders are recognized by the cooperative association and are allowed to lend in the building. The good news is that more and more lending institutions are offering co-op financing so there is a chance you can continue to work with your current lender. 

Myth #5 – Cooperatives are more strict with their rules and regulations. 

Over the years I have seen a few co-op associations that had additional rules and regulations but nothing that I would say were overly restrictive. One area where cooperatives do often differ from condominiums is with their rental policy. Many co-ops will limit the total number of units that can be rented at any one point in time. In addition, they may limit the amount of time one unit can be rented out. If the ability to rent out the unit at some point is important to you as a buyer, it is important to ask the owner or their agent if they are aware of any rental restrictions. Also, if you are looking to purchase a unit solely as an investment, a cooperative may not be for you. 

Myth #6 – Co-ops always have extra fees that you have to pay.

What people are referring to is what’s typically called an underlying or blanket mortgage. This is a loan that the association has taken out to do work on the common elements of the building like the roof or elevators. Like the property taxes, the amount an individual unit owner will be responsible for will be based on their percentage of ownership share. If there is an existing underlying mortgage, a purchaser would subtract that amount from the loan they are receiving as you will assume this amount as a second mortgage and will take over the monthly payments.  While this may seem daunting, it’s very common for a condominium to take on a special assessment for the same reason. Additional costs outside of the monthly fees can happen with either a co-op or a condo, the only difference is the process in which a unit owner makes the payments. 

Myth #7 – There is a chance I might be rejected by the co-op board.  

One significant difference between a cooperative and a condominium is that before you can take ownership of a co-op you do need to be approved by the board. The original reason for this approval process was so that the association could control who lived in their building so the interview process could be very rigorous. Today, the interview process tends to be much more relaxed and casual. Typically as long as you have  the financial means to stay current on your mortgage and monthly fees, and agree to abide by the rules and regulations you will be approved. Each new owner will go through an interview process before settlement and will need to be approved before they can close on the unit.  

There are certainly differences between cooperatives and condominiums that one should know and understand before they start their search for a new home. As with any type of housing there are pros and cons to each. Many of the classic, early 20th century buildings in Washington, DC are cooperatives and people have been living in them happily for almost one hundred years. It is important to work with an experienced agent who knows the difference between the two types of housing, the specific questions you need to ask and can guide you through your search. 

Andy Hill is Executive Vice President and Managing Broker for the Washington, DC and Maryland offices of McEnearney Associates.

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