The world of real estate has undergone radical change in the last ten years, from the rapidly-growing importance of the internet to the popularity of grouped real estate services. During this period, two trends that have taken shape have greatly impacted the industry: specialty mortgages and professional home staging.
Specialty Mortgages: Risks and Rewards
Homebuyers today are presented with a landscape of home financing options far more diverse than anything available to previous generations. First time homebuyers, customarily forced to choose between traditional fixed-rate mortgages and standard adjustable-rate mortgages, may now choose from a number of specialty mortgages that effectively allow them to “stretch” their income in order to purchase a home. The tradeoff for buyers is a significantly greater risk than is found with traditional borrowing formats.
The history of non-traditional mortgages is something of a “chicken or the egg” story: flexible mortgages have been both a product of the recent real estate boom and a cause of its escalation. Flexible lending practices have made home ownership possible for more of the population than ever.
Specialty mortgages generally begin with a low introductory payment plan or interest rate, which is sometimes known as a “teaser”. In these cases the monthly payments or interest rates will increase significantly at a later date. Also available are “low documentation” or “no documentation” mortgages, loans which come with lax qualification requirements but much higher interest rates and fees.
Another increasingly common practice is for lenders to set the loan amount at 100% of the price of the home, requiring no down payment. These loans present a real financial risk for the buyer because they assume that the value of the house will at the very least remain the same. Some loans will even allow the buyer more money than the appraised value of the home, which represents a huge economic hazard should the unexpected occur.
Buyers have more choices than ever when selecting a home loan. A few of the more popular types of “exotic” mortgages:
Interest-Only Mortgages- Interest-only loans begin with an introductory period (usually either 5 or 10 years) during which the buyer’s monthly payment only covers the interest of the loan. During this timeframe, the buyer’s payments do nothing to reduce the total of the initial amount borrowed (known as the “principal”). Higher payments that cover interest and the principal kick in at the end of the introductory period.
Negative Amortization Mortgages– The monthly payment in negative amortization loans is actually less than the amount of interest owed on the loan. The unpaid interest is added to the loan’s principal amount, meaning the total amount owed grows each month rather than decreases.
Option Payment Mortgages– These mortgages give the buyer the option to make different types of monthly payments including interest-only payments, payments lower than the interest owed, and payments designed to repay the loan in 15 or 30-year periods.
40-Year Mortgages- Most mortgages have a life of either 15 or 30 years. A 40-year mortgage reduces the required monthly payment and gives the buyer additional time to repay the loan, but also increases the total amount of interest paid.
The main risks of exotic mortgages are payment shock and greater overall debt. Payment shock is the term given to the sudden increase in monthly payments required when the introductory period expires. It is not uncommon for monthly payments to rise as much as 50% during these transitions. Greater overall debt is a risk with these types of loans because the overall amount paid by the borrower is larger than with traditional loans, and may be a higher value than the equity in the property itself.
- Buyers who will sell the home within a few years
- Buyers who anticipate a large increase in income in the future
- Buyers who intend to own the home for many years
- Buyers who don’t anticipate large income increases
The best way to decide if a specialty mortgage is right for you is to consult a proven industry professional. An experienced real estate associate can guide you through the complicated world of mortgage options and point you to lenders whom you can trust.
For additional reading on lending practices, visit the Center for Responsible Lending at www.responsiblelending.org.
The Art of Home Staging
The overall appearance of a listed property, both inside and out, plays a crucial role in a successful sale. That simple fact is the driving force behind one of the fastest-growing trends in the real estate industry: home staging.
While factors such as location and asking price affect a listing’s success, they are often out of a seller’s control and are unlikely to convince a buyer to commit to a listing that they find aesthetically unpleasing. Sellers have long known that improving their home’s appearance increases the likelihood of a faster sale or higher closing price. Home staging is simply the process of using professional consultation and assistance to enhance a home’s visual appeal.
It takes more than simple cleaning to make most homes attractive to wide range of buyers. A coordinated home staging highlights your home’s strongest suits, masks its shortcomings, and generally helps the buyer imagine how the home might look if they lived there.
Home Staging is commonly misconceived as a form of home decoration. In fact, the opposite is true: the purpose of home decoration is to individualize spaces in your home, whereas one goal of home staging is to reduce the personal touches you have added. By presenting furnishings, room arrangements, and decorating styles that are more universal, the staging makes it possible for your home to impress a wider range of buyers.
- Re-painting bright walls to neutral, space-opening colors
- Removing excess furniture/furnishings to open up spaces
- Rearranging existing furniture to improve room flow
- Removing/replacing family photos, art and personal decorations
- Adding new lighting and/or window treatments
- Replacing current furniture with rented pieces
The home staging profession has developed over recent years into a full-time real estate support industry. Thousands of individuals have studied to earn the Accredited Staging Professional (ASP) designation from the International Association of Home Staging Professionals. These professionals provide services ranging from simple consultation to a full re-working of a home’s interior and exterior. The cost of employing an ASP depends on the degree of staging you desire as well as the amount of work that you contribute to the process.
Many real estate professionals today hold ASP designations, offering staging services either for an additional fee or in some cases included in the overall listing package. In addition, most associates are familiar enough with the concept to provide basic staging advice or refer you to a qualified ASP if desired.
Initially, home staging was primarily a tactic used by sellers of luxury properties who wanted to distinguish their homes from other high-end listings. Today staging is common within nearly every price range and niche market.
Home staging is particularly beneficial if your home is either currently vacant or is still your primary residence and has been for some time. In the case of vacant homes, staging livens up empty spaces and provides a visual frame of reference for buyers. If you have lived in listed property for several years, staging simplifies each room and allows the home’s quality to speak for itself.
Many sellers in slowing markets use staging as a way to add value to the property. The tactic also works in highly active markets, as often a home staging sets the property above a list of comparable houses.
Ultimately, staging provides sellers an effective means of securing a competitive advantage.
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