Jonathan Wolk, AIA, NAR, is the founder and president of Wolk360 a real estate brokerage and design-build firm in Raleigh, North Carolina. Wolk360 specializes in real estate acquisition, listings, and renovations with a team of real estate professionals, architects, engineers, and contractors.
Jonathan where do we begin this discussion in such an aggressive real estate market?
The first step is pretty basic. It’s not what you think you can afford, it’s what the bank says you can afford. That being said, you need to sit down with at least two lenders and run through the numbers of what you make, credit history, car payments, debt load, etc. The bank may even tell you that you can afford a $2,000/month mortgage payment, but you realize you can realistically afford a $1,300/month payment, but the upper end of the approved amount will stretch you because you know your lifestyle, expenses, and real-time budget. Lenders all have different programs, rates, and deals so you want to talk to several of them, especially for a first-time homebuyer. Some will waive the PMI, which is if you own less than 20% of your home. There are kinds of offers and programs and you need to evaluate the best option for your family.
You may be interested in a $150,000 home or condo but in a hot market, you may have to pay $200,000 for the same home because of the competing cash buyers. You have to consider if you can pay the difference to get the home or be willing to walk away from it. The recent problem in this market is that you can get more money, you can afford it, but the appraisal of the home is under the asking price. Then you have to make up the difference in cash because the lender is only going to go give the appraised value of the property.
So many variables come into play in today’s market. You need to understand how much cash you have and then how much you can afford in a mortgage payment. For example, the $150,000 home may cost you $170,000 but you have due diligence money to make up the difference. Paying the $15-20,000 due diligence money is a non-refundable payment to the seller and it still applies to your down payment on the house, but if for some reason you don’t get the house that is a lot of money to put at risk, especially for a first-time buyer.
What about gift money from family or friends?
If you have family or friends who want to give you money for the down payment there are all kinds of tax implications involved. It must be documented in a “gift letter” stating it’s not a loan. If it’s a loan from them, your lender has to factor that into the equation because you have to pay it back. When saying it’s a gift, the IRS wants to know the person receiving the gift. It is a very common practice, especially with first-time home buyers. There are many financial aspects of figuring out what you can do. What capital do you have to put into it, whether it’s due diligence or extra money to pay over the asking price? In an accelerated market, the entry price point for first-time buyers is a lot to handle and it’s easy to get frustrated. Right now, we are seeing four to five offers on entry-level homes before one gets accepted.
How has this hot market affected mortgage and financing for your clients?
Everything costs more now. You come in thinking you are going to buy a $450,000 house, but in reality, in this market, it’s going to be $500,000. Being diligent and careful is important because the market is very aggressive right now. Realistically a mortgage payment based on the $450K versus $500K price is about $100 a month difference. However, if you are pushing the threshold at $450K that additional $100 could be a breaking point. But at the same time it’s hard to walk away from a home you love being the fifth time searching and you lose out on it over $100 per month. Then the decision is how can we save that $100 additional mortgage payment to get the house we love and want? Do you sacrifice a monthly dinner out, or consider your internet and cable options? There are many adjustments to be made when handling these decisions and it’s tough. This is why we like to sit down with our clients ahead of this and get a handle on the financial implications and so we know their limits while helping clients make these decisions in the heat of the moment because buying a home moves fast. For example, we submit an offer, the client is excited, then we get a call from the seller who says, “Ok we’ve got six offers and we are calling for high to best at 8 am tomorrow,” and it’s 8 o’clock the night before. So now the client has to make a serious decision on their finances and it can be stressful, which is why it’s beneficial to work through those scenarios beforehand.
Tell us how you help clients with the emotional aspect and their financial thresholds.
Ultimately it’s the client’s decision but we try to guide them the best we can and have this conversation beforehand knowing that this is the likely outcome in these scenarios and play it out ahead of time. We say to our clients, “Okay, when we get into the heat of the moment and you’ve told me your threshold is $450K what do you want me to do or say at that point. Now you are telling me that you love this house, but it’s above your maximum and you are saying you will drop your club membership and put in a treadmill and work out at home to save the money, or whatever,” which is why we try and walk through this beforehand so everyone is on the same page.
Let’s say the clients decide they can afford a $500K home and put 20% down to save on the PMI, but what if there is a shortfall on the appraisal side and you have to come up with more cash? There are so many variables that come into play which is why you go through these scenarios ahead of time. It’s difficult because clients fall in love with homes, neighborhoods, schools, location, layout and they want it to happen. However, in an escalating market, it can explode quickly.
Walk us through the importance of title and mortgage insurance.
In most cases receiving a title are a cut and clear process. You are buying the home from a seller who has owned the home for years. The title is basically tracing the ownership of the property. However, sometimes you are buying from a trust, inheritance, the family member that died 10 years ago and the will just get settled to sell the property. Clear title is the legal responsibility of the seller. When a seller puts the property up for sale they are saying that they have a clear title and rights to sell the house or property.
There are other title issues that can get convoluted, but the more common one is a family inheritance with 30 heirs and they haven’t cleared all the heirs that could have laid claim to the title. We just finished one with a family who had been there for hundreds of years. It was an old farmhouse and when they did the search to declare heirs there were about 2,500 people because their last name was Smith. The title company had to post advertisements, and anything else to make sure that nobody can come back after the purchase and declare ownership of the property. These types of conflicts must be resolved before anyone can sell and close their property.
Have you ever had an unusual situation regarding title claims?
Yes, there was a property that involved seven sisters. They all had kids and their children had children. There were 97 descendants of those sisters that had a potential claim to the property’s title and it took over a year to clear it up. There were also issues on the property side. When a survey was completed it showed the property lines on one side, but an adjacent property owner presented a survey where the property line was different. To solve this the owners had to go back to the 1600s to see the King’s deed of that property line in North Carolina. Now, this was a case where you had two property owners who did not like each other. Many times you can resolve the differences, but this was clear animus between the owners and they had to go through a long court battle to resolve the issue. This is why a clear title is so important. 90% of the time it’s clean, easy, and simple, but there are those that get very complicated.
Sometimes lot numbers can come into play with developers or builders. We had friends who bought a lot #14 but built on lot #15. They thought they were buying lot #15 but the paperwork was for lot #14. It’s just an example of how properties can get confusing and complicated. Imagine if they had closed and no one caught this error, it all worked out in the end, but it could have been a huge problem down the road.
What is the advantage of WOLK360 during a home inspection?
As an experienced architect and builder when I walk through a home for a client I see things differently and so does our firm. We see imperfections that need to be addressed, renovated, moved, and shuffled. The beauty of our team is that we come to the table with different eyes and potential solutions beyond those of a normal realtor. For example, we see electrical, HVAC, and plumbing issues that surface just by doing a walkthrough. We can help evaluate and engage whether or not something is a serious issue for a specific property. The difference between a design-build firm with real estate brokers is that we can assess specifics on the fly and provide credible technical advice and solutions on prospective homes for our clients.
Our team can walk through a house and assess within a short period of time whether or not our clients need to walk away from a property. Or we come up with solutions for the buyer’s future needs based on their lifestyle. We provide our buyer clients with a skillset of expertise that eliminates the need for a second opinion. You have a full team behind you making these purchases with as much information as possible.
In this hot real estate market are clients getting what they want?
The bottom line price is not always the factor in this market and that’s what I try to tell our buyers all the time. You want to make your offer as attractive and easy for the seller as possible. The first thing is the contingent on selling your home first which means instead of closing 45-days you may be looking at 60-90 days? To offset that, it’d be best to put down more due diligence money because you need the 90-days to close. This shows the seller we are confident we are going to close so we will give you $50K! To add it up, there’s a selling price, $50K due diligence, and offering $50K over the asking price. It all comes down to what is the makeup of the offer. Many times you don’t have the ability to understand what is the bottom line for the seller. Some sellers have a specific number in mind and they are willing to wait six months to get it. Other sellers need to move quickly and their bottom line number is not an issue but quick closing is important because it meets their needs. The difficulty in this type of market is not knowing what the seller’s motivation is and knowing that can really help strengthen your offer.
Wolk360 in Raleigh, North Carolina, is an innovative and creative buy-design-build firm specializing in helping clients create the perfect home. The firm is unique in that it has a multi-disciplinary team of designers, architects, builders, and real estate agents, so clients do not have to deal with multiple players when pursuing their dream. From real estate acquisition, planning, development, demolition, and building they serve residential and commercial clients with high-quality start to finish custom projects.