Money Rehab with Nicole Lapin - How to Get a House Under Asking and Myths about Mortgage Brokers

Episode Date: May 24, 2022

Is it worth lowballing a seller in this housing market? Real estate broker Erik Miles answers this question and more in the second part of his conversation with Nicole. If you liked this episode of Money Rehab, you'll love Episode 275 - Renting Versus Buying Tug of War. Check it out here: https://link.chtbl.com/S358XjHp?sid=RC  See omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Yesterday, my amazing real estate broker, Eric, came on the show to tell you the story behind the bizarre reason my rental application was recently rejected.

With the current market, what's your latest advice right now that you're giving folks deciding on renting or buying? Sure. And LA is a unique market. And a lot of the things that I would advise in LA may not apply if you're living in Nashville or Minneapolis or St. Louis. So take that into consideration, right? LA is a very unique market. This is an international market, international money, huge industries. Hollywood, we spoke about. Tech is here in a big way. It's just LA is a beast. And so speaking to the LA market, it's still a seller's market. Inventory is historically low. But what we're seeing is that rates are going up. Buyers are more informed, more than are more informed than ever. So they know about inventory. There's Compass, there's Zillow, there's Redfin, you know, buyers have access and information and they're following the markets. And so rates are

going up. You were already in a pandemic before, so that created all types of anxieties for buyers. But now you add another layer, you know, I guess it's kind of like the third year of the pandemic, essentially, or at least two solid ones. And adding this interest rate increase anxiety on top of it, what it's doing right now is the home prices in LA are still, they're holding steady right now and homes are selling faster than they've sold in the pandemic. But I don't think there's going to be the acceleration of the prices. I think that the interest rates going up is going to kind of help the prices kind of stay somewhat flat. I also think that because inventory is so low that, you know, if you're investing, that you're that you're still in a good spot. What I try to do is to talk to people that have been in LA for 20 and 30 years. And those people kind of give us the

best window into like LA real estate. And those people, the prices just don't go down. So it's like, get in, hang in there, um, and, and invest in places where there's some value. So they do some value in LA. Um, you know, there may not be value in West where there's some value. So there's some value in LA. There may not be value in West Hollywood, Beverly Hills, value in terms of upside. Obviously your money is safe there, but you're gonna pay a higher price per foot there. But there are opportunities in South LA,

there's opportunities in the Valley right now where you can take advantage of lower prices per foot and kind of be in that next we hope and kind of think ahead. And that hope, you know, and kind of think ahead. And that's what we try to help our clients do is how can we get you into a place where it's a home that you love and also where, you know, that there's the opportunity to create some, you know, some equity and some wealth for your family. Well, because it's a seesaw, right? As rates go up, prices are supposed to go down. I mean, you say flat, I guess that would be the equivalent

of going down. In LA, that would be the equivalent, right? Yes, exactly. Yeah. And so again, the supply, there's no supply in a cold, like they're historically low. So for every well-priced home, if it's turnkey, in my opinion and experience, there's five or six buyers in LA. And when I say five or six buyers in LA, I mean, one of those is probably cash. Two of those are financed with sparkling credit. One of those two that's financed with a conventional loan has a half a million or a million dollars saved or whatever that is. They can put 50% down. And then you get to your conventional buyers who just have it, they're 20%. And then you go to your you know fha and va folks that have

five so there's it's and it's madness in la and it's and then that's why even if the prices don't continue to go up they will kind of continue to to maintain you know kind of that flat level which which is fine again over five to seven years you'll be you'll be in great shape and ten even better yeah i mean you go to these open houses and it's like, they're giving something away. Oh my God. We just listed a property in the Hollywood Hills. A really cute two-story condo. I've sold four in this development and we had 50 people at my open house on Saturday and Sunday. And that's like five years ago. Not even a thing. I mean, I remember going to open house. They'd have cookies. Like you go in, you talk.

It'd be a couple folks, maybe. Brokers, you tell me, would stress out. Are people going to show up? Like any event, right? If I'm hosting a book event, I'm like, oh my God, are people going to show up? Now, forget about it. Like, wear your mask. Yeah.

Because there's a lot of people in there. There's going to be a lot of people in there. Yeah. So we have waters and mincer people and like you know good luck refresh look at the house right no cookies no cookies no don't got time to bake they're gone right so yeah so i obviously bombard you with a bunch of links because of compass and zillow as you say and redfin and all of the places that are available to consumers. Like back in the day, the multiple listings used to be for brokers only. And that's why you need a broker because you wouldn't have access to that. So now that's been democratized. Why then should people think about working with a broker versus doing it themselves? It's essential. You really need to work with an agent. So in LA, you're aware

of a house that hits the market. What's harder for you to do is to price that listing. How much should you pay for that listing? And then once you know how much you should pay for it, Eric, how do I beat these five to seven other buyers with terms? So you need to understand how to draft a contract, how to write a contract, how to strategically position yourself to actually get into the house. And then once you're in the house, well, how do I make sure that the, how do I kick the tires on the house? So inspections, who do I call? How do I make sure I'm not buying a limit? We help you with that. Eric, I want to buy a house. I have all this money, but I want a loan. Institutional banks are kind of tricky right now because the rates are going up. And in some cases, they don't want to honor their rates and they play games. We work with

some of the best lenders in the country with 100% closing rates. So if you get a loan with our people that we know, I mean, if you get approved with our people, you're going to get closed. So there's, yes, you know that a house is for sale, but that's not enough. And so that I'm glad that you asked that question because that is the value that agents provide now, even though that the consumers know a house is there. You got to you got to be able to get it and then you got to be able to know how to close it. And for sellers, you see all these prices, but the price that you listed for is not the price that you ultimately want, right? So in many cases in LA, in particular, the homes are listed well under their market value. And then the agents help the

sellers actually extract that market value. That is a very sophisticated thing and a technique and a skill. And unless you have an excellent agent, you're not going to be able to get the top dollar for your listing. Yeah, because you don't have access to the comps like you have. Even though the multiple listings has been opened up, you're the only one that can pull those comps. We have to analyze it, right? It's complex, right? Why is one house a comp and not another? And which ones are the best comps? Which comps is the market going to agree with?

Which comps are the agents going to agree with? And you need to have experience to do that. A seller can't pull up the internet and say, oh, yeah, my health is worth X. There's a lot that goes into it. So we help our clients do that. Yeah. We just had an auto broker on the show too.

And just like that, it's not that you pay their fees. The banks pay them. So you're not paying extra to have this help, just to clarify. Oh, that's absolutely correct. So with this current market, what advice would you give people who are ready to put an offer in for a house? I think that real estate is one of the great ways to generate wealth, create family wealth. I think that buying a house can cause some anxiety.

But in my experience working with... I'll use first-time buyers because those are people who haven't bought before. My clients are so happy that they jump they they jump off the ledge they're so happy right it's like there was oh eric i'll actually this morning i was just meeting with the client this is such a great so i met with a client she's amazing um we we did her first deal she was buying in the hollywood hills a cute little condo and she was like eric i'm gonna be poor i'm gonna be eating ramen noodles she was a she does well she's a baker we bought got her little condo. And she was like, Eric, I'm going to be poor. I'm going to be eating ramen noodles. She does well. She's a baker. We got her little condo for, I think it was like 630, right? We sold it, I think two years later for 825. And she bought her dream house in the Hollywood Hills for like a million three, million four. And you just have to get that first

one and that will unlock so many things for you. So I would say, if you're thinking about buying a home, you know, consult with professionals, obviously, of course, get a great lender, get a great real estate agent. And if you've got your money saved and in your rest of your portfolio, whatever you're doing investment-wise is sound for your future. Real estate is a great way to start generating additional wealth. And if you're in LA, I don't think there's a better place to buy real estate right now. With all due respect to Miami and all the other crypto bros going to Puerto Rico

and wherever they're going, I think LA is the place to be. I mean, we're not sinking anytime soon, right? Not to my knowledge. Hopefully not. Hold on to your wallets, boys and girls. Money Rehab will be right back. Now for some more money rehab.

So if you can't afford an asking price, do you think it's even worth applying? I think you should make offers in good faith, right? So you don't want to be making offers in homes you can't afford, if I'm understanding your question, right? But so you want to understand kind offers at homes you can't afford if i'm understanding your question right um um but so you want to like you know understand kind of where the market is and like what the market value is for the house even if it's listed under you know and like say for example let's just use another easy number if it's listed at 800 and your agent tells you it's worth a million and you're only approved to 900 you know maybe that's one to shy away from but also um you can you know think

of terms to maybe make your offer stronger there's a number of things that you can do um that's one to shy away from. But also, you can think of terms to maybe make your offer stronger. There's a number of things that you can do. That's not just price. Sellers want a great price is one of the things a seller wants. There are other things that they want in terms of certainty of closing, removing contingencies that you can do to make your offer stronger. Right. That's what I mean.

So let's say you were approved for $900 or $850 and you fell in love with a $1 million house. Should you still go after it and put in a lower offer? And then what are some of those sweeteners that can make you more attractive that aren't price related? the things that you can do to sweeten your offer if you can only go so much on price would be shortening your contingencies firstly so typically in a contract here in la there are three contingencies that people really talk about and that are material that's your inspection contingency um the the standard time is 17 days during the pandemic last year we'd gotten down to like uh the first year the pandemic was like okay 14 to 12 days um last year it was like uh 12 to 10 and this year it's like five to seven for inspections so we're doing them faster that's what sellers are expecting the appraisal contingency is one that sellers would like to see removed an appraisal is where your lender will send out an independent appraiser to

come put their valuation on the property and you want it to either meet or exceed your contract price. And if it doesn't meet or exceed the contract price, buyers typically can cancel or they can negotiate a price adjustment with the seller. Sellers don't want to do price adjustments right now. So that's another thing you can consider removing, the appraisal contingency. And the third one, and this would only be recommended for people that are highly qualified. So let's say you're someone like Nicole and you have great credit and you have great savings and your loan is maybe, let's say it's already partially underwritten and just waiting for a property to be identified.

As long as we felt good about all the other factors, let's say it's a turnkey property and we love the price, you could consider removing your loan contingency. What that does is make your offer almost as good as cash. And that's the best position you can be in as a cash buyer. And so removing or shorting your inspection contingency, which is, again, we only do that with the advice of an excellent agent. Only do that with the advice of an excellent agent and then removing your appraisal contingency potentially and then removing a loan contingency are the three things that you can do that aren't price related to make your offer stronger. So removing a loan contingency is just fancy verbiage for paying in cash. No, because paying in cash is actually,

hey, I have my proof of funds. Here's my offer. Here's my $1 million in my bank. And I'm a cash buyer. I can close in 14 days. Removing the loan contingency is, hey, I have $350 saved and I have my 20% down payment on this million-dollar house. And my offer would be subject to me getting a loan commitment, but I'm removing that because I have all the savings, my credit's great, and I'm already partially underwritten. And essentially this commitment that should come in two to three weeks is a formality. So I'm willing to shift that risk onto myself and remove the loan contingency. So it's like cash, but not cash, because I don't have that million dollars in the bank. I have my 350. I'm just removing my ability

to cancel the deal if I weren't able to get a loan in three weeks. Got it. So if you can't, you're putting the onus on yourself, you can get what penalized? Fine. You could have to pay. Great great question go to timeout no what's it there's a in our contracts here there's what's called a liquidated damages provision which caps the damages if you default to 3% of the contract price okay so that 3% here in LA you put that initial 3% of the contract price. Okay. So that 3% here in LA, you put that initial 3% into escrow within the first three days that you open escrow. So that money is already there. And let's say that you removed, uh, your loan contingency in this hypothetical and you get to

day 21 and you don't have a loan contingency and you know what like nicole was referencing la sinks and banks don't want to do loans here on houses well you remove your loan contingency you have to buy your damages are limited to that three percent so um that so you don't get that back three percent get that back in this case if you default. That's right. That's right. That's right. And then the appraisal and inspection stuff is just like, you hope there's no termites. Right. Yeah. You hope there's no termites. You hope that the fireplace isn't, you know, you have a lot of 1920 houses out here and

people build fireplaces and then nobody goes in them until they're about to sell or buy a house. And so a lot of times the things that are surprises with inspections are fireplaces. Like what's in there? Well, like the brick starts to crack. No, worse. Like the brick starts to crack. The mortar is cracking.

You know, structural. You know, a fireplace is a major structural component of a house. If it's defective, that could be a big ticket item. Foundations. So it's the hidden things with inspections that you kind of worry about. And that's part of the risk of, you know, whether or not to remove an inspection contingency or not. Typically you want to keep that inspection contingency in there, shortening it. You can move quickly, get it done right away. Five days here

is plenty of time. So we always like to keep that inspection contingency in there because we need to kick the tires on the house. The appraisal contingency is one where I would say it's most easily removed here because the home prices have been going up consistently or being steady. And so that is the least risky of the contingencies that people are removing. that people are removing. Yeah, that makes sense as another sweetener because, I mean, knowingly or unknowingly, if the owner had some sketchy thing going on with the fireplace, then they would be out a lot of money. I don't know, tens of thousands of dollars potentially to fix that. So if you're removing that, you eat that cost. But then that's on you. And all this stuff, just as a reminder, can be so expensive. It can be. Right. So we make these decisions on a case-by-case basis, right? And so you start with what type of house are we dealing with? Is this a brand new house, new construction? Are there

warranties already in place? Is there a reason to believe that the house is in near perfect condition? Is this house from 1950 a fixer? And so in the former case, you would be more comfortable shortening your inspection continuity or maybe removing some things. But on the case where the house is a little bit older, you want to be very careful because that's where things tend to break down over time. And so there isn't a one, there isn't one answer for folks, you know, that are entering the real estate market. It's kind of an analysis that we do and we guide them case by case based. But these are kind of some of the things that we're toggling, you know, on each deal. For today's tip, you can take straight to the bank. When I apply for apartments, I include a letter. Money Rehab is a production of iHeartRadio.

I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team, Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.