I just completed my first presentation of one of my new classes: "Financing, Dollars and Sense©". When you are a trainer, you pay a lot of attention to the faces of the people in your audience. I'm constantly scanning their faces for: confusion, boredom, disbelief, and best of all, the "Aha!" expression. In the first run I had virtually no boredom that I could see (a good day!) lots of "Aha!" and some combinations of confusion and disbelief. In this course, the disbelief became a clear "I never knew that, Yipes!".
The response pleased me, because it means, to me, that I'm on the right track with this course. My contention for quite a long time has been that real estate agents have shifted the entire financing part of the transaction to the lenders. The reasoning used is: "Well, the buyers have to have a pre-approval letter, anyway." Or "The lender can do this better/quicker than I can", etc. The problem is that we are now reaping the bitter fruits of that harvest. A recent Wall Street Journal article stated that approximately 1/3 of the sales in July, nationwide, were short sales or foreclosures. We all know now how we got into this mess-too many loans made to too many unqualified buyers; unscrupulous lenders, who, knowing that the loan would be sold, did not hesitate to make a loan that had slim to no chance of being repaid; stupid buyers who didn't understand what they were getting into; greedy buyers who thought that the inflation in real estate prices would last forever-I could go on and on, but I won't.
Let's get back to my point-which is financing is part of the transaction that the agent should be closely involved with from start to finish. This matters even more if you have chosen to represent the buyer as a client. I use the word client in the sense used by the NAR Code of Ethics, and as is generally understood in the context of agency: a client is a consumer you are now representing. Once you make a consumer a client, (as opposed to a customer), you pick up, in virtually all states, fiduciary duties to that person. Those fiduciary duties include, usually, advocating on behalf of your client, protecting them from foreseeable risk and harm, etc.
When I started in real estate, in the mid to late 1970's, we always financially qualified buyers before showing them homes. Period, end of sentence and end of discussion. My first brokerage was the family owned business; and my Mom told me: "Don't waste your time if they can't afford to buy; and don't show them things they can't afford, because then what they can afford will disappoint them." Good advice then; good advice now. Did it work? Absolutely! Last year, I had an encounter with a former client I had sold a house to 30 years ago. She said to me: "I never forgot what you told us when we bought our first house. You told us to look at the payments, and our budget, and to make sure that the mortgage payments would not strap us so much that we wouldn't have money to go out for pizza, go play golf, and go on vacation. We took your advice, and I'm so glad you did." I live for that kind of remark!
In that time period, Fannie Mae stuck to its original ratios of debt to income-the lower end ratio of 28% for PITI (Principal, Interest, Taxes and Insurance) and the higher end ratio of 36% for all debt. Nowadays, FHA has more liberal ratios (33% & 43%) and many conventional lenders will stretch the upper end ratio, for borrowers with ‘excellent credit' to 50%. But when I walked my students through the math, they were stunned (some of them). Some of them were nodding and were already there. One student related being fired by a new home builder for telling buyers they could not afford that particular home. Another employee of the builder sold it to them, and they went into foreclosure within a year. Is that the American Dream, or is that a nightmare?
You see, when you walk through the math, here's what you understand: first of all the ratios are based on gross income, not net income; and you can only live on your net. Even when you tinker with the numbers by having the borrowers adjust their withholding,(in most places, buying a house is roughly equal to two standard deductions, or two kids) in order to increase their net pay, the stretched mortgages and the higher ratios do not leave a lot of money for all the other things consumers have to have, or want to have: food, clothing, car insurance, life insurance, car maintenance, house maintenance, utilities, personal items (gym, hair, nails), vacation, entertainment, medical expenses, tuition for soccer camp, pets, gifts, and maybe even savings!
My students had some real eye opening moments when we ran through the difference both term and interest rate make to amortization. Many of them had never done the math for a bi-weekly payment. We looked at a real amortization schedule and talked about how our clients could pre-pay a mortgage by simply adding next month's principal. At the end of the class, most of them said they had learned a lot and intended to be more of the process with their buyers. That's my goal: to have agents understand the process, understand the numbers, and be able to show their buyers exactly what the numbers are. Many buyers who are taken through the numbers will say: "The lender is willing to loan us $XXX,XXX, but, you know, we really aren't comfortable with a payment that high." If more of that had happened in the mid 90's to the mid 2000's, we might not be where we are today!
I'll be offering a version of this course at the Ohio Association of REALTORS® Convention, the 20-21st of this month in Columbus, Ohio, and I'll be also offering this course all over Pennsylvania. To contact me, email me at: Melanie@TheMelanieGroup.com
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