Spring has Sprung and the 2023 buyer is starting to emerge from the Shadows. Early guesses on how the demographic for 2023 will turn out compared to previous years? Younger. Higher Income. Less Down Payment. Part of the reason for the lower down payment is the age and lack of time to save up. Another factor is very apparent- Fewer people are selling their home and then using the proceeds for the next down payment. That means that a higher percentage of our clients are making offers with 3-10% down.
With this lower down payment a common factor- We continue to see the same mistake again and again from our Buyers and Agents. Forgive me as I must now bore you with math based on a recent transaction.
Client was looking at a home listed at $750,000. Buyer has $50,000 saved up. He is putting down 5% ($37,500). Borrower walks on water from a debt to income and credit perspective. Simply lacks cash at the moment. Then I am CC’d on the email-
GREAT NEWS! WE HAD YOUR OFFER ACCEPTED AT $740,000!
So- Kudos to the buyer’s agent on fighting for $10,000 for her client. But- Here is the math on how that looks to the buyer from a cash perspective.
Option 1= Lower Sales Price. $740,000 Sales Price.
5% down = $37,000.
Lower rate- Buyer chose to pay $2000 in points to buy the best rate on market.
Homeowners insurance 1 year = $1100.
First month’s house payment interest only = $2500.
Loan costs =$5000. (Title/Escrow/appraisal/lender fee etc.)
In total $47,600 to close escrow. $2400 left in the bank. Yes the buyer can close… But it makes for a more uncomfortable position if/when the inspection shows possible repairs in the future.
What if the buyer instead offered $750,000 with a $10,000 Seller credit towards closing costs?
OPTION 2= SELLER CREDIT.
5% down= $37,500.
All fees remain the same= $10,600.
Seller Credit towards closing costs +10,000.
In total- $38,100 to close escrow. Now the client has $11,900 left in the bank at closing. Much more comfortable buyer in a much better position financially. Yes his house payment is slightly higher (~$60) but he has a much larger pool of reserves if something goes awry. Studies on mortgage delinquencies consistently show the number #1 cause of trouble = Not enough reserves. A seller credit towards closing costs helps this.
Reminder its the same dollars in the pocket to the Seller on both scenarios. Significantly more dollars in the pocket of the Buyer.
*Note this is just a cash flow example. Using the credit on a 2-1 Buydown makes for a MUCH LOWER house payment but that is an entirely different future blog example 🙂
Buyers/Agents- When you are placing an offer this Spring- Don’t forget the BUYERS bottom line. And don’t hesitate to give us a ring! Would love to go through the scenario together anytime!
