Historically, rising interest rates force hesitant buyers to jump from the fences and into the fray. As rates have begun a steady climb recently, borrowers are clamoring to lenders in order to lock rates before they increase even more.
Just like old times, right?
Not so fast, says Luciano Scala, the venerable loan officer with Pinnacle Financial Partners.
“I am having more applications and writing more pre-qualification letters, but there is a problem. There are no houses,” he says.
So Scala is helping would-be buyers prove their credit worthiness to the sellers, only to have the clients return from the buying experience empty-handed.
“Many times, the houses receive as many as 30 offers,” Scala laments. “And the buyers must begin their search again.”
Scala, his colleagues and his competitors are heavily regulated and must comply with numerous guidelines.
Much can change in a person’s financial condition in a short amount of time. For example, a car that that a person owns free and clear could give up the ghost, and the hopeful homebuyer might need to finance a new car. Such a purchase could wreak havoc on a person’s debt-to-income ratio.
In the current market, with each house getting numerous offers for more than list price, appraisals also become an issue. If the lender has approved the buyer for a certain loan amount based on the person’s income and cash on hand – and the buyer learns the seller will not accept on offer with an appraisal contingency – the buyer must be able to front the difference between the sale price and the appraised value with cash.
Lenders such as Scala must deal with trying to get an approval based on a financial condition that could change at any point. Unfortunately for buyers, especially those with marginal financial means, most purchases require the sale not be contingent on the buyer’s ability to secure a loan.
Additionally, the inspection is being conducted and results evaluated on a pass/fail basis. With no-contingency offers being the new norm, there is a potential recipe for disaster, and it could be death by 10,000 paper cuts.
If a buyer has his heart set on a certain property and makes the standard contingency-free offer – and the appraisal comes in some $20,000 low – the buyer must come up with $20,000 they had not planned to spend.
And if that’s not bad enough, what if the inspector finds $8,000 in repairs that have to be made immediately. On face value, the $8,000 is not terribly frightening, certainly not enough to squirrel the deal for the dream house.
However, add that to the $20,000 for the appraisal shortfall …
With diminished cash and a house appraising for less than the sales price, that situation could force the lender to increase the interest rate slightly. Suddenly, the buyer has less cash than before, a higher monthly expenditure and must buy the house or lose his earnest money and, at that point, lose the property.
Not to dwell on the negative, but if the buyer buys the house and exhausts all his cash and cannot afford the monthly expense, he might have to hold the property for several months for the home to appreciate in value for what he paid for it.
Sale of the Week
Kimbark Drive in Green Hills is a locale that once was the land of duplexes. Since that time, new construction has proliferated. The house at 1949 Kimbark stands tall on property welcoming residents into several acres of newer homes with nary a duplex in sight.
1949 Kimbark Drive
Jeremy Jeter of Engel and Völkers Nashville listed the towering structure for $1.299 million and sold it quickly for $1.375 million. As is often, but not always, the case, the list price was the starting price.
Jake Griffith of Village was the buyer’s representative in the deal.
Built in 2020, the 3,210-square-foot home sold for $428 per square foot and includes four bedrooms, three full bathrooms and one half bathrooms. The house features an “oversized gleaming kitchen with Five Star appliances under lustrous and stylish lighting” writes Gabe Nies, the listing agent in the home’s original sale back in 2020.
As an example of the market shift since it first closed in December 2020, the property stayed on the market for 58 days before selling for $955,000. The seller in last week’s transaction owned the house 15 months and saw an increase in value of $430,000. Chances are the new owner will see a similar rate of return.
The Midstate real estate market continues to suffer from low inventory and extraordinary demand. Real estate professionals wait until the last minute to schedule showings so that the properties are still available for showing.
One broker had a buyer – from California, of course – and ran active listings for condos between $200,000 and $400,000 in ZIP codes 37125, 37205 and 37212.
At 7 a.m., he booked three appointments, with the first stop at 11 a.m. Before he arrived at the first one, all three were sold. Time to hit Starbucks and regroup.
Richard Courtney is licensed real estate broker with Fridrich and Clark Realty, LLC and can be reached at [email protected].