Today Rob and Adrian share a story about the mindset behind buying your first home and things you should consider. Tune in and let us know what you think.

Links & Resources Mentioned:

https://roi-fa.com

https://roi-tax.com

https://delavan-realty.com

https://www.directorsmortgage.com/loan-officer/adrian-schermer

www.getrichslowpodcast.com

ROI Disclosures

Episode 31 Transcript

SUMMARY KEYWORDS

home, people, rent, house, big, compromise, miles, Adrian, market, Idaho, rental, buy, talked, point, wife, rental market, uber driver, story, pullman, hear

SPEAKERS

Rob, Intro, Adrian

Intro  00:02

Welcome to the get rich, slow podcast. This is the stuff we and our expert guests wish we knew a decade ago to get the most out of our financial life will provide you with insight into wealth building activities and practices that can expand your net worth exponentially. get insight from top professionals who will reveal how to build wealth the long way, work smarter, not harder and identify your financial blind spots. With over 25 plus years of experience as licensed real estate professionals and a long track record of winning for their clients. Robin Adrian will teach you what it takes to be an everyday real estate millionaire.

Adrian  00:44

Hello, future millionaires and welcome back to the get rich, slow podcast. I’m your co-host, Adrian Shermer, and I’ve got robbed elegant Here.

Rob  00:52

Good morning. We’re looking forward to a fun one today.

Adrian  00:55

All right let’s fire it up.

Rob  00:57

Okay, so this is I’m going to try to tell you guys a story in his linear of a way as possible with a whole bunch of different points. And Adrian just hit me with all of the relevant questions because you get them all. This last weekend, it is fall time. So, it was the end of September. I was sitting down and having a discussion with my brother-in-law, who has been married to my sister for maybe a couple years now. And they are looking for their first home.

Adrian  01:34

The warms my heartbeat, I love a first-time homebuyer story.

Rob  01:38

And it is and they’ve enjoyed a good portion of it. They’ve seen a couple dozen homes already. And they’re in eastern Washington. So, think Washington State University, and it’s right on the border of Washington and Idaho. So, Lewiston, Idaho Pullman, those are kind of the two places they’re 2030 miles, there’s some ancillary markets around them, that sort of thing. But there’s a big divide there between Washington and Idaho, different tax laws, different political affiliations of the two states. Yeah, which is interesting. Yeah, Idaho is deep red, and Washington is deep blue. And just a lot of different things going on there. With my sister and brother in law’s search, the number one thing that he was selling, and by the way, I’m in the Portland metro area, which is, I don’t know, a couple 100 miles away, this is not an area that myself nor any of my brokers or my brokerage serve, so they have their own real estate broker there. It’s always kind of fun to listen and hear just to hear what experiences are with other folks in my exact profession.

Adrian  03:01

Yeah, and I find that fascinating to sidenote. This isn’t 100 This isn’t like always, you know, rule of thumb true. But I have found that some of the more successful Realtors actually have a narrower you think the map gets bigger, but sometimes the map gets smaller, because they go, I’m going to focus on my market. And even though I could make money on this person all the way on the edge of the map, I don’t know that area. So, it’s better service to my clients to refer them to someone I vetted than to go, I’m the smartest person in the world, I can do everything I can do any loan, you know, anywhere, especially realistic, you have to do transactions in that marketplace. And you got to have, ideally, I like how your brokerage is set up, because you guys are all learning from the pool, even if someone’s a new broker, and if they join your team, they gain access to that knowledge. And, you know, that’s something that has a lot of value. To me.

Rob  03:49

It’s a concept of, you know, I’d rather be you know, a mile an inch wide and a mile deep, you know, in my in my profession, then, you know, a mile wide and an inch deep. Yeah. And then you can surround yourself with mild deeper next to you, instead of having to do it all yourself. The so where they’re at is my sister doesn’t, she works in Pullman at a local hospital there. And she doesn’t like and has some anxiety with driving in that area in the wintertime, the 2530 miles that it would be to drive from Lewiston to Pullman five days a week as a commute, especially in snow and ice and you know, all of that there’s some there’s some pretty steep hills and different things which you know, I get it. Not, not a lot of people from Western Oregon, who don’t really experience much snow ever. Just that that’s an understandable anxiety point. She is going to have to grow into that. She’s going to get used to it more and more. But that’s probably going to be a thing that takes you know, probably a few years.

Adrian  04:58

It does it does happen faster than you think that when my wife moved with me to Maine for a bit, which is where I grew up, I’ll never forget because she was she’s same thing hyper nervous, we did the parking lot thing you know, you write the brake, you try to upset the car, help them understand what it feels like to slide and how, how to react to that without panicking. And I’ll never forget, she called me once she was like, I’m at work, I saw a snowplow flipped over on the highway. And I was like, Oh, my God, what

Rob  05:22

do you do? Well,

Adrian  05:23

I had to work. My shift was going to start so I drove to work. And I was like, wow, that’s, you’re a true painter. Now. You’ve earned your

Rob  05:29

stripes. Exactly. And it will happen. But that’s going to happen over time. And let’s be real. And this is the fun part of you know, the stories of these real estate transactions. It’s really not about the real estate. It’s about the person and the people and the relationships and their life change intersections of buying the real estate, right? Yeah, they’re gonna buy it for a reason. So that’s a big driver for her. And that’s not going to go away any fat as fast as it takes the time, you know, two months, three months, whatever it is to buy a home. So, she has to work on that. Well, you know, we always hear happy wife happy life from all these husbands, especially the newbies, right? The US veterans, you know, we just know that’s a baseline. Yeah. So anyway, so they the brother-in-law, the husband, he’s telling me, well, you know, she wants to be up in Pullman. And I want to be down in Lewiston, where it’s cheaper, and up in Pullman, and you know, he’s he grew up like a conservative type of guy, and Adrian and iron in the business and making judgments. This is this is just the story. But he was saying, I don’t know that I really want to live up there. And you know, my wife and I are kind of going back and forth. I don’t really want to pay the extra to live in line next to in a liberal college town. And he’s definitely looking down his nose at liberal. Right. Sure. And, you know, so I’m going, Okay, interesting. And then what?

Adrian  07:01

Well, cultures matter, you know, so, so we’re at location, super common one.

Rob  07:07

Right. And, and kind of weird that it’s like political, you know, but I mean, its, people care about that the

Adrian  07:13

denser area here, less dense area, there is a swing,

Rob  07:16

right? It’s so then, and then as price, right. And then of course, they have their list of all the things that they’re looking for. And at the end of the day, it’s $100,000, more up in Pullman, than it is to be in on the Idaho side, you know, 25 miles away. So, at that point, I’d heard enough to really start asking some probing questions. And my questions are, okay, so what, you know, what have you found? Is it doable? In the two locations? Where are you at? What is the compromise, and we just start going down that that list, and where we basically came to was, and just for brevity’s sake, I’ll lead you straight to the answers. First of all, he’s not buying his dream house, the house that he’s buying right now is getting to the point where he’s actually paying every month, a mortgage, yes, it’s interest. But interest is favorably looked at from a tax standpoint, also, he is paying down his principal, every month to a certain degree, even at the beginning of a loan, even though it’s a smaller amount, but he’s getting nothing from his monthly payment in rent. So that’s his big transition right now. And he’s focused on that. And he gets that and that’s why he’s looking for a home, you know, they want and then also as a relationship, they want something that they own that they can do with what they want, they like, you know, a little bit of a backyard out there, this is a little bit more rural America than, you know, what we’re dealing with. And you know, the bigger cities on the West Coast, we don’t really consider them west coast, even though they’re only at you know, the other end of the state. So, at so where we were we came to was okay, I needed to explain to him or get him to explain to himself, which is actually better than me just making points. The fact that this is not your forever home. This is a starter home, this is a big step, going from a renter who’s not building wealth to an owner who is building wealth over time. And he’s probably only going to be in this house for a year or two. Political affiliation doesn’t really matter if you’re keeping an eye on that big picture of hey, I need to not be paying rent and I need to be owning and paying down a mortgage. And coupled with your wife isn’t going to be happy 30 miles away right now, as she works through the anxiety of dealing with you know, driving in the snow in the winter conditions. So yeah, the moral of the story at the end of it. He basically told me, so I’ve been doing and thinking 100% wrong on all of this? And I said, well, since you put it that way, yes, you have, because you’re prioritizing all of the wrong things. Sure, the priority here is getting into a home, making sure your wife can work through, you know, her anxiety and her concerns. And you’re gonna have to work on that separately from a real estate transaction, but it’s not going to go away overnight. But you can own something. And, of course, if he’s not into being living in a liberal college town, in a couple years later, buy another house, and she’ll probably be working elsewhere or be more used to it. And frankly, if you if you’re not a big fan of liberals, if that’s your issue, then rent to them. Their money, the same color of green. Yeah, you know, this is where, like we say, and I don’t necessarily affiliate with him, you know, in on that side of things, but I’m saying, hey, if you have a problem with that, then, you know, revenge is the best revenge is living life. Well, right. Yeah. Just as when absolute rent to those guys, those, you know, yeah, well, college is not infected with a lot. That’s the point. And, and actually, I was talking to one of my brokers about this exact same thing. And that’s exactly what she said, she said, you know, living in a liberal college town for a couple of years is not going to turn you into a liberal, unless their ideas are really, really good. Unless they’re right. And, you know, if that’s the case, then you’re gonna lean more that way, you know, than you otherwise would. So

Rob  11:45

that the, the process, and it took, we talked for probably an hour and a half. And that process, going from somebody who smart guy has no debt has a good job he’s married has a wife has a good job, you know, between the two of them out there in a much cheaper market than, you know, Portland Metro, definitely much cheaper than, you know, the big cities, California and New York, you know, so forth. They make good money, you know, they between the two of them, they make into this low six figures. I mean, sure, they’re perfect, have great credit, you know, the IDI sevens. I mean,

Adrian  12:22

perfect. We work with people well into income, well, well below that. But when you’re in that range, unless you’ve really laden yourself with debt, odds are you can very easily use the word but yeah, you can generally tuck away the down and, you know, make it happen for yourself, and you should write, but it’s an interesting dichotomy there. And this is kind of indicative of this gestational fear period that we have talked about a few times, which is, you don’t just it’s not, I mean, I’m a hybrid researcher, for all the stuff I do. But you know, some people decide, hey, I need a car, they go to the dealership to pick the car up, a home is a much more complicated, because there are like, you’re saying, here, this is a factor that might not matter at all to certain people, they just see a house as a house. And they don’t think of the political influence or what culture is in that area. And they’ve got to sit there in line item, these things out and go, Okay, I want a big yard. And I want to live in the city. What was that cost? Together? What’s the intersection of those two things cost? Actually, it could be $200,000. And in the sticks, it could be there aren’t even houses that don’t have giant yards, that we don’t have any lots out here. So, you’ve got to guess and test your way through that process. And it’s worth thinking about because you’re right, is not being in a liberal town worth your wife being afraid to drive every day. Right? And he would say laugh in a heartbeat, he’d say, and that but I hear that much. Exactly. You’ll find out what is important to you in this process. If you if you take the time. Yeah. Make to be deliberate about it. And we’ll see I think the people who do this we see less buyer remorse, would you agree?

Rob  13:57

Right. Absolutely. And to your point, the last piece, which really was kind of in the middle of this entire process, or the entire conversation was that concept Exactly. Is well I’ve seen 25 homes and there’s not really anything that I can afford. Well first of all, that’s not true. Because he could afford a lot more than what he’s paying right now and rent he’s paying like they’re, they’re renting out a little tiny home out in the sticks are just far enough out in the sticks that the rental there just has no met rental market for it. And he was trying to relate that to what it would cost to own a house. Well, the monthly payment on that leads to that that cost needs to be somewhat in line with what he could rent the house for as an exit strategy if and when he ever needed to relocate elsewhere. Both Adriana, you’ve talked a long time about or many times about an exit strategy other than you know, short sale foreclosures if the market goes down, that sort of thing. Well, if you’re in rental home and just float, roughly breaking even. Usually, you can ride out a market a bad market turns that sort of thing. So, absolutely. Your point there. Exactly. So, your point there is, and really what I was telling him in, not so many words is quit being cheap. Because really at the end of the day, his wants anybody who tells you that, oh, I can’t find a house with it. And there’s

Adrian  15:34

I don’t want to compromise. Right? That’s what I hear. That’s exactly.

Rob  15:37

So, price or product. The housing market is Uber efficient. This isn’t 35 years ago, when your parents got the phone books from the listing service. Yeah, that literally had each page was a house for sale. And it came out every quarter, right? People could race out the first few days and not have competition because they got to it faster than others. Right? The internet has created a whole new universe you can window show every single home.

Adrian  16:06

I’m a car guy. I’m a car nut. How is that a car market right now collector car market? Everybody knows what they have. There is no barn find anymore that that is like, we’re going to talk about that someday and laugh about, you know, you used to be able to find the wanted ad or the What’s that? The famous joke about the gal? You know, she sold the Porsche for 2000 bucks or whatever. And it’s because it’s her ex-husband’s and he said, exactly sell it for me. This is, you know, it impacts other markets. And it is it is capitalism and action. But it is kind of that self-adjusting system where capitalism sort of works. To a degree it’s a successful system in its own self adaptability.

Rob  16:48

Right, right. It’s Uber efficient. And at the end of the day, somebody says, oh, no, I can’t find any houses. Oh, there’s not enough inventory. No, your budget doesn’t match what you’re looking for. Yeah, you’re not. So, you need to up your budget. You know, the rough way to say that is quit being cheap. Four, or lower your expectations, you know, lower square footage, one less bedroom. Okay, you went home with one car garage, painful instead of two or three smaller yards. I mean, you know, different things. And it comes back to their individual situation is, you know, they’re looking for all of these different things. And in Pullman, which is, you know, the more popular area, yeah. is, you know, close to college, that sort of thing, much higher rents. We’re talking like, 20 30%, higher rents. Yeah, but 20, you know, and he’s complaining that it’s 20 to 30%, more expensive. So, as soon as he kind of chewed into that, it became very obvious to him, oh, okay, well, I need to adjust. And frankly, you know, and you know, he’s not a dumb guy. I got to do what my wife wants me to do. First of all,

Adrian  18:03

it’s very interesting. Yeah, we see this a lot. We see this a lot, a lot, a lot. This is not, this is an anecdote, I know. But I have run into this behavior. Many times, it is a folly of, especially first-time homebuyers, they will fall into this trap where they see a house, it’s almost perfect, but it’s just missing that one thing. And they do that about eight times in a row. And their expectation is that price point. And then and then they find the house that has everything, and it costs more, and they but it costs a lot more like a lot more. And that’s because that that combination of all those things, we talked about this a bit location, yard garage, these are some things that like, aren’t hard to find in a metro area, right. But they’re really hard to find all together at the same time, usually, some compromise had to be made, or that’s the diamond in the rough and everybody knows it. So, when it hits the market, it commands a premium, because it is one of very few properties that do check all those boxes. And most properties by nature of budget or, you know, the physical landmass that they’re on or whatever it is, they have some sort of compromise, that was fine for the person who owned it, but might not be fine for you. So, you’ve got to choose between those compromises or find a way to raise your budget. And I think they’re that a component as well as the permanence that people feel right. I’m signing up for a 30-year loan, I’m buying a house you know, there’s all this money closing costs, etc. But as we discussed, you know, you’ve got to sometimes just appreciate that this is going to be very likely a steppingstone, especially if it’s your first home. Right. Spend some time now you’re leaving home. Yeah, yeah, no. And the alternative is a compromise as well. It’s renting. It’s no equity. It’s whatever is available on the rental market. It’s funny how many compromises people will accept for rentals because they see it in their mind as a more temporary thing even though people will stay in the same rental for about the average is about this same six, seven years, six, seven years for a house to some people buy a house and keep it forever, maybe your parents did. And that’s the ideal that you’ve gotten your head. Sure, but that’s because by the time you were born, or shortly thereafter, they did buy the house that you lived in for 20 years. Right. And it was their third house, or their second house, at least most typically.

Rob  20:19

So, the I’ll close, you know, this story with addressing kind of that myth of the dream house, right? Everybody, typically, like the typical bell curve, right, the vast majority of people, especially, you know, families with children, and that sort of thing, and eventually, you know, kids, but then, you know, retirement and, you know, more financial independence, usually, with retirement and so on. What happens is your dream house, you know, that wide eyed couple, you know, just got married in the last few years, you know, and they’re all so happy to not be renting anymore, and they just, they love their home, they’re so excited and so proud of it, right? That first home, that’s where my brother and sister are my brother in law and sister, then, you know, if they decide to have children, or if they decide not to, who knows, but their incomes going to increase over time, their taste is going to increase, and they’re probably going to buy a second you know, another home and either keep it as a rental the first one or sell it family scale. Exactly. And then, you know, let’s say they have a couple children, they scale up again, you know, they get a couple dogs and a cat, and, you know, all the all of the things that go with that, well, you end up at, you know, to 20 503,000 square feet above up, well, then the kids move out. And the same thing, this, this is that normal process, that dream home, you know, you finally get that dream home, the kids are in it for three, four years during high school because you actually could afford it. And then they’re out and now you’re dealing with 3000 or more square feet, and you want to travel you’re working, you know, you just want to simplify life. You don’t want to clean you know, five toilets in the house. I mean, just all of these things and then it’s

Adrian  22:06

25 miles worth of banisters and baseboards and baseboards and

Rob  22:10

and you end up with contract it just because and then like single level versus two levels, two thirds are very efficient for you know, homes with lots of people in them, but less so, you know, conversely, it just it gets very interesting how the Dream House morphs. And eventually it’s okay, I want to condo, that service via an elevator, that’s a quarter of the price of what I really do. And so that I can you know, buy the second condo in Hawaii or in you know, Panama or wherever I want, you know,

Adrian  22:46

great well look down on condos all the time. And I love I know, I know people, there’s some people, they’re just like, Dude, I don’t do anything. So great. I’m like, that does sound pretty sweet. It’s sounds pretty great. You know, with Yeah, you and I, once you get a house, that’s let’s say 2000 square feet is or more. Right? It is like, it’s a part time job taking that, you know, yeah, I can’t, I’ve spent too many hours of my life cleaning baseboards.

Rob  23:11

So, so anyway, so it just, it’s taking the people through this process, and trying to get them and I can’t just tell them, hey, tackle this, this learning curve dummy. Like I can’t do that it’s not going to get it’s an experiential learning, they have to go through it. With that said, they can tackle it a lot faster. If it’s brought out of them in a, you know, sensitive, caring way. Yeah, but also in a factual way. And it requires a lot of relationship and a lot of trust. And the quicker you can build that trust, the quicker and easier they’re going, most people are going to be able to hear the more pragmatic side of, hey, let’s get you into something that’s going to work for you and serve your needs today. Because two, three years from now, what’s going to serve your needs today is going to be different. But you can take those steppingstones and the hardest house is always the first one, right? The second hardest one is the second one. And then after that it starts getting easier. So

Adrian  24:13

yeah, for a lot of important pieces I need to go into of that psychology. So, I love this story. It also highlights the difference between a real true-blue realtor, and you know, what would you I love that phrase you had it’s like an Uber driver with

Rob  24:30

Oh, yeah, unfortunately, my industry that I’m in, you know, a good I don’t know, plurality, maybe even majority of us aren’t worth a whole lot more than, you know, Uber drivers that opened doors. And it’s unfortunate because those of us that really, really focus on what our clients need and a lifetime of wealth building through real estate.

Adrian  24:58

We’re saving them from very expensive mistakes, it’s hard to undo a mistake like that, like choosing the wrong location, because you didn’t really have the value proposition laid out, too. This is what it actually cost to live here. And here, here’s what you’re paying for. And that’s, again, part of that deeper market understanding as well, understanding this is how far out you have to go to get what you want for the price you want. So, which compromises we’re going to make to bring you, you know, to offset the other compromise.

Rob  25:29

Right, right. And that’s the whole big concept, you know, the get rich, slow podcast, you know, everything that we’re doing and talking about, you know, we’re also I say this all the time I have it behind me making every day real estate millionaires every day. Well, yes, we’re making steps to that. But what we’re not saying is, you’re going to get rich tomorrow. Remember, it’s the get rich, slow. The idea is, is make really good choices with really good professionals that are going to help you win at this game over the next 30 years. And you do it, you know, you can’t help but win. So anyway, we should leave it there. This is a fun one. I don’t know in the next three to six months, I’ll update you guys and tell you what they ended up doing. Please do it. It’ll be a really interesting. Just an interesting thing to follow. So

Adrian  26:24

All right. Thanks again, audience for joining us on this episode of the get rich, slow podcast. We’ll catch you next week.

Intro  26:31

Thank you for listening to the get rich, slow podcast. If you like what you learned, please subscribe, rate and review so we can grow wealth for even more families.

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THE GET RICH SLOW PODCAST

EPISODE TRANSCRIPT

CATERGORY: REAL ESTATE

Adrian Schermer:

Hello future millionaires and welcome back to The Get Rich Slow Podcast. We are your hosts, Adrian Schermer, Robert Delavan and Mr. Brilliant at the basics, Lance Johnson. Good morning gentlemen!

 

Robert Delavan:

Good morning, happy to be here.

 

Lance Johnson:

Good morning there, Adrian. Good to be back. Back in the saddle

 

Adrian Schermer:

Yes, back in the saddle. You can watch The Get Rich Slow Podcast, or I should say you can listen to it on Apple Podcasts, Spotify, Audible, Amazon Music, as well as a few other platforms that are smaller. We are also on YouTube if you’d like to see the video, and you can follow along with the presentation that we have with some slides showing what we’re attacking. And today, this week, we’re gonna talk about some… seller credits and I want to start this off by talking about a big win I had with Rob’s team. We were doing a purchase. We had a first-time home buyer, which is always awesome. They really wanted to have a seller credit to assist them with closing costs. We’ve talked about this before, you’ve got your down payment, but seller or closing costs can be something that especially first-time home buyers don’t necessarily expect and it’s great if we can have the seller pay for that. We’re going to chew into that a little bit more in the episode. But in this particular case, we had someone with an accepted offer. It had a $10,000 seller credit on it. We actually got a little bit more because of some needed repairs on the property after the inspection, which…

 

Robert Delavan:

Mm-hmm.

 

Adrian Schermer:

…is a whole episode on its own. But the property still also appraised for 10,000 over the contract price.

 

Robert Delavan:

Mmmhmm.

 

Adrian Schermer:

And we’ll dig into this a bit more what that really means, but I’ll tell you, the end result is that this client effectively won $20,000 thanks to excellent negotiation and just the way that seller credit works you know? They bought the house, the seller paid for $10,000 of their closing costs, and it’s still appraised for over.

 

Robert Delavan:

That was a killer deal, and we can use the term “won”. I prefer to say that it was leveraging what the market will allow right now. And this is winner 2023 so… But yeah…

 

Adrian Schermer:

Mm-hmm.

 

Robert Delavan:

…it was a total win. I mean, the clients were ecstatic with getting a new house and having less cash out of their pocket through this process.

 

Lance Johnson:

And just think about it a year ago, you know, interest rates are down coming out of a great market during a pandemic, which, whole separate episode.

 

Robert Delavan:

Mm-hmm.

 

Adrian Schermer:

Yep.

 

Robert Delavan:

Mm-hmm.

 

Adrian Schermer:

Yep.

 

Robert Delavan:

Right.

 

Lance Johnson:

And people were paying 150,000 over asking price, having to come in with money because it wouldn’t appraise, and you feel like a win because you’re getting a seller concession, which we haven’t seen for a while.

 

Robert Delavan:

Right.

 

Lance Johnson:

What a change from a year ago.

 

Robert Delavan:

Yeah.

 

Lance Johnson:

you know, just great.

 

Adrian Schermer:

Oh, yeah. Yeah. We all heard the stories, right? 10, 20, 30, 50, 100,000 over market value houses selling for.

 

Robert Delavan:

Yeah.

 

Adrian Schermer:

The demand super, super high, and this is kind of one of these advantages. There’s always a win, right? Like there’s no, I don’t want to say there’s no bad market, but it’s true. It could be bad for one party or the other, but generally, you know, it’s a matter of negotiating advantage, right?

 

Robert Delavan:

Yeah, exactly. So this will be a fun episode. Today’s episode we’re going to focus on buyer credit and seller concessions as you guys probably are already kind of figuring out. We do work on a Realtor.com article that we’re pulling from, that just had a advice, sell, what are seller concessions, that sort of thing. So we have a baseline there and that’ll be linked in the episode disclosures and so forth. But we’re looking forward to this, this episode and we’re going to dive in a little more. Throw it to the next slide Adrian. So What we’re really going to cover is what is the seller credit and seller concession, how to use it, cap amounts some stories. Lance is I think gonna pick our brains a little bit and then we’ll round robin it. The biggest thing to know with these seller concessions is they create a win-win for the seller and buyer. Even though the seller’s giving something up. There’s definitely some advantages in this market and we can talk about that, and like I said, we’ll be working through some scenarios.

 

Lance Johnson:

Great, well, let me kick this off, and you guys are both in real estate, right? Adrian in mortgage and Rob in real estate and construction and property management. What is a seller credit for people that don’t know? Kind of dumb it down for people like me and just make it simple, and what is a credit versus a concession? And talk us through that.

 

Adrian Schermer:

Great. So the first one, seller credit, seller concession, sometimes called buyer credit as well, although it’s a bit of a misnomer, all the same thing. The seller is paying for some of the closing costs and it’s an allowed process. You’re not allowed, a seller can’t contribute usually to say a down payment. There’s rare cases where that’s allowed, usually between family members, but they can contribute to the closing costs, which are, especially for folks doing a lower down payment, can be as much as their down payment in some cases. So it’s a great way to cut down that cost and the accessibility to that potential buyer. And

 

Robert Delavan:

So examples,

 

Lance Johnson:

Yeah, so what are some of the costs associated that they can pay down? So, you know, like things that I know about are points and, you know, there’s prepaids, so, you know, if you’re having your real estate taxes paid for, and insurance, there’s actual costs associated based on the rates. So walk me through some of the things they can and can’t do.

 

Adrian Schermer:

Yeah, absolutely. For most lenders, you’re going to have a flat fee that we charge in order to do the loan itself, and that’s how we keep the lights on, we keep everybody paid. Points themselves, you can have a cost for buying a lower than what would be considered market or par rate. That could also be a credit, although at this time in the marketplace, we’re generally seeing more of a cost for given rate being a more popular option. We’ve got state and government recording fees, title costs, including title insurance and the cost to file all of that paperwork. It could be a notary cost if someone’s going to come out to you, and it’s also, as you mentioned, the impounds. We’ve got taxes and insurance. You’re going to pay the seller for the remainder of the year that they had paid for the last time taxes were due. You’re going to pay for your first year of homeowners insurance, and in the case that you have an escrow account that… Part of your payment each month is going to include 1/12th of your taxes and insurance. That escrow account is going to be set up with a two month buffer, because we know taxes and insurance are probably gonna go up year by year, and then enough money seeded so that as you make your first payment, you’re on track. That 1/12th of taxes and insurance is going to be, you know, added to a pile that already exists so that when taxes come due in say, October like it is here in Oregon, there’s going to be enough money in there to make that payment. And as I mentioned that cost I have seen that hit 3% or even more of the transaction in many cases. Your mileage may vary and state to state. You’re certainly gonna see a big difference. I remember when I used to do loans in New York Super high property taxes that amount of money could be a serious chunk of change

 

Lance Johnson:

Yeah.

 

Robert Delavan:

And then also walk through, well, and maybe you don’t see these as much, Adrian, but on the, you could also call a credit or concession would be like repairs, and that would be the condition of the house. Just to use a few examples, let’s say certain types of lending require you can’t have any exterior paint that’s peeling.

 

Adrian Schermer:

Mm-hmm.

 

Robert Delavan:

So let’s say there’s some repairs that would be needed and required by the lender. There’s also just the normal inspection items. Let’s say there’s radon, you know, high levels of radon coming up from the crawl space or the basement and that needs to be taken care of, mitigated and you know, that’s a couple thousand dollars typically in our market. Something like that where, or, hey, there’s a rotted deck or the roof is leaking or I mean the list goes on and on and on. Every structure has its issues, even brand new construction. there are always things. So there’s also ability for concessions for repairs in addition to the traditional closing costs that you already laid out.

 

Adrian Schermer:

Yeah, absolutely, and any of those that are paid directly to a vendor, like we’re having the roof repaired by a roofing company, those don’t count within the closing cost bucket. So they won’t hit any of the closing cost limits because there are caps on what percentage of the purchase price these concessions can be, depending on the loan type, and I’ll chew into that in a second. But as you’re mentioning, Rob, you know, sometimes we get this “Hey, the floor is damaged” – “Well, we don’t want to repair the floor before closing, it’s gonna take two months for a floor guy to get out. We want to close now. So that repair is gonna be a thousand dollars. Why don’t we give that in the form of a seller concession?” The Seller is going to pay a thousand dollars with your closing costs that frees up a thousand dollars in your pocket when you go to closing, and then you can use that to your discretion to get that repair done, and I believe actually in our example even We had that $10,000 seller credit initially. I know that we grabbed another couple thousand in that sort of, it’s that inspection, right? You do that inspection, the scratch and dent special. It reminds me of like bringing your dad or your uncle to buy your first car. If they’re good, they’re gonna run over that and go, hey, is that a little scratch on the fender? You gotta knock some money off the price. Same concept here, but applying…

 

Robert Delavan:

Right, right..

 

Adrian Schermer:

…it in a way that saves you money at the right time.

 

Robert Delavan:

Right. Yeah, that’s a, that’s an interesting, which actually nicely segs us to question two, and Lance, let’s see, you could target, you could target Adrian or I on that one, whichever dealer’s choice.

 

Lance Johnson:

Well, yeah, I mean, I did have a follow up question on the, you know, it seems like one instance is it’s around the repairs and they can, you know, the inspection, and then on other instances, it’s, you know, there could be a gray area there. So there’s negotiations, right? Like, so the floor could be 1000 could be 4000 depends on how, how deep you want to get in. So if there was flooring in a bathroom and you have to get to the other sub floors and stuff like that and there’s rotting and mold and stuff, it could really amount up, and so that’s where real estate agents like yourself have to go in and say, okay, you know, here’s a high end, here’s a low end. Obviously the seller wants low end, the buyer wants high end. There’s a negotiation and that’s… Sometimes an arm length transaction is helpful, right? So you can take the emotion out of it and stuff.

 

Robert Delavan:

Yeah.

 

Lance Johnson:

Well, let me ask that. So how do you use the seller credits, both the seller side and the buyer side of the transaction? Scenario one, offset the cost of repairs of a home inspection, which you guys were alluding to. Sweeten the deal for an on-the-fence buyer. So a buyer likes the house, but not sure if they want to make it. Maybe the numbers are at their top end. Incentivize buyers to stay in the deal when there’s lots of competition in inspection. So it seems like competition really kind of sets if you have 10 buyers and they’re negotiating, you know, we saw where there was no concessions, but now that inventory is greater and now things, you know, interest rates are higher, there’s less buyers, that now you’re starting to see some of this stuff. And that really has a mark on. the credits of the seller side.

 

Robert Delavan:

Yeah.

 

Lance Johnson:

So why don’t you guys speak on that?

 

Robert Delavan:

And that’s a big piece of this. Adrian, you’re gonna have your take on this from a lending side, and that’s really gonna then kick into kind of the third piece we wanted to look at is like the caps and so forth. But yeah, Lance, you’re exactly right. The first two scenarios here are similar in that we’re not really dealing with you’re dealing with repairs, you’re dealing with sweetening the deal. Number three is where it really starts kicking in, competition and so forth. But it’s market trends. So the first scenario is just, hey, this buyer, they’re looking at a, and remember, we’re in the Portland market, just building out a typical scenario that we’ll see a $400,000 home. And it just, that the deck is going to cost 20 grand to redo. You know, and the roof needs to be repaired. It’s, you know, 10, 15 year old roof and it hasn’t been well maintained. Well, that piece, your typical buyer who’s kind of entry level, first timer, that sort of thing, they just can’t afford to pay closing costs, down payment, all that sort of thing, and do all these repairs on the house. They just can’t do it. So that’s the piece where the seller from the get-go is just gonna disclose, hey, guess what? This roof isn’t great. We’ll make sure you give a roof cert or do repairs or replace, you know, depending on how bad the deck is, that sort of thing. So make it so that there’s not as much dollars out in that time where that buyer is most vulnerable. Which is when they’re buying the house, you know? They’ve saved every last dollar that they can possibly come up with, begged, borrowed and steal to get that down payment. Especially the first timers.

 

Lance Johnson:

Well, it seems like it’s a moving target where they go in and it’s a  $400,000 house. Some cases the price might have gone up a little bit, maybe not so much anymore. It’s stayed flat. But then interest rates go up by the time they close or lock in their loan, and now the payment’s 400 bucks, 300 bucks more than they anticipate when interest rates were rising on a month-to-month basis. So… Yeah, and you know, top end is top end. Nobody wants to feel house poor. So,

 

Robert Delavan:

Exactly, exactly.

 

Lance Johnson:

yeah.

 

Robert Delavan:

So that makes a big difference. Another piece, and this was in this article, that we referred to and have in our disclosures here, is basically just being in a position to like sweeten the deal for that buyer that’s picking your house versus the one up the street. “Hey, we’re gonna do a new deck” or, more common. “We’re gonna certify that the HVAC system is in good working order” per manufacturer specs. We’re also going to provide a home warranty so that…

 

Adrian Schermer:

Oh yeah.

 

Robert Delavan:

…if in the first year, if the washer dryer or HVAC or any of the systems within the house that would be expensive to replace, for think appliances and so forth, that those sorts of things would be covered for that buyer. So it’s just like, kind of more of an incentivization. “Hey, pick our house versus the next guy. We’ve done more due diligence upfront.” The third scenario, and I really want to give you guys a chance to kind of comment on this, is this is where you’re really like at that point where you’re almost through the inspection period, this buyer knows that it’s getting to the point where it’s really a buyer’s market and they have the opportunity to go to a number of other properties, or at least they’re presenting that they can do that, and they’re like, “ah I don’t know”. When there’s competition in the market for that buyer. and more sellers than there are buyers, let’s incentivize them, not just like sweeten the deal up front, like a, “hey, we’re gonna offer a home warranty”, like scenario number two, but number three, we’re actually saying, “hey, we’ll go ahead and replace that roof”. Because that was the big sticking point, or , you know, something to that effect, which actually gets the deal closed. You never know the situation that the seller is in if you’re representing the buyer, or at least. You try to find out as much as possible and it’s amazing how often you’ll actually get the story. But if that seller really needs to sell and there’s a certain piece like a $15,000 roof, why not rep for the buyer, push for that, and get that done? And you know, the seller says hey, “you know we’re getting our $400,000 price point, but really it’s 385. It’s a $15,000 roof. Let’s get that done.”

 

Adrian Schermer:

Yeah.

 

Robert Delavan:

because we want to close

 

Adrian Schermer:

Yeah.

 

Robert Delavan:

so It’s just that, it’s exploring the dynamics almost of the negotiation at that point.

 

Lance Johnson:

Yeah, you know, it’s interesting from my, I often will get in a meeting with clients where they’ve been up to bat three times in a row, especially when the market was, you know, interest rates are low, and you had to put $100,000 in the Portland market just to get the house.

 

Robert Delavan:

Right, above right?

 

Lance Johnson:

And maybe they didn’t have that cash and they had to come in, and so they were always number two, number three. And so there is and this is probably a segment we should do there is the art of locking down the, the property because you can do all the planning you want but if you come in two, three, four and, you know, we’ve seen it where people are frustrated. They want to get in the house…

 

Robert Delavan:

Yup.

 

Lance Johnson:

…interest rates are rising and yet you know they, they come in, you know at some point in time we should talk a little bit of the art of locking down a deal.

 

Robert Delavan:

Yeah, Yeah.

 

Lance Johnson:

…and there’s a way to do that and use the inspection to figure that out.

 

Robert Delavan:

Absolutely.

 

Adrian Schermer:

To negotiate that bit. Yeah.

 

Robert Delavan:

Yeah, that’s a really fun one. Just a teaser for that episode. I’m actually writing that down now for another episode here soon. Thanks for that idea, Lance. Is really trying to figure out what the other side wants. And it was amazing how many times when it was crazy competitive, where we’re representing a buyer, we’re not the highest, but we’d still get it. Rather than just throwing 100K over list price at it. How about 70K? but we’re not gonna ask for this or this or this, or we’re gonna give you time or other things that are important to them.

 

Lance Johnson:

Yeah.

 

Robert Delavan:

So that’s actually a lot of fun.

 

Lance Johnson:

Well, cool.

 

Adrian Schermer:

Absolutely.

 

Lance Johnson:

The third question, what are the caps on concessions that a seller can contribute to the buyer? So, you know, there’s limits, right? You just can’t go right this check out. So, why don’t, Adrian, maybe you take a look at that there, what kind of caps are there?

 

Adrian Schermer:

Yeah, yeah, and here’s ones for the, this is one for the show notes or, you know, if you’ve got a pad of paper this is the moment to grab some data for you. So the cap is, and these are based off the purchase price of the home, so the first one, three percent for a conventional loan with a loan to value above 90% in other words that you have a 10% or lower down payment then the seller concession can be no greater than 3% percent of the purchase price Once that loan to value exceeds that 10% down payment, so between, in this case 75.01% to 90%, it goes up to 6%, and then with a 25% or greater down payment, it’s going to go to 9%. These are for conventional purchases as a primary residence.

 

Robert Delavan:

Mm.

 

Adrian Schermer:

If it’s an investment, it’s capped at 2%. For FHA loans it is 6%. So that’s a big one. There’s a much higher seller credit available for those FHA, which is really popular with first time home buyers. So sometimes that can be an advantage there. It’s 6% with USDA as well, and then one of my favorite types of loan, the VA, the veterans loan is capped at 4%, which is awesome. Cause that one can be up to 100% financing, zero down.

 

Robert Delavan:

Mm-hmm.

 

Adrian Schermer:

A veteran therefore can also on top of that get a seller credit for up to 4% of that purchase price and in many cases that is well more than your typical closing costs and we have a bit of play there with closing costs because as a loan officer we’ll often use this term – we talk about “soaking up” closing costs. If you have a 3% seller credit, but your closing costs without points comes to let’s say 2 and a half percent. You might soak that extra up by buying extra rate. I did that when I bought my house. I had a bit too much left on the table. And that’s the thing about the seller credits. If you don’t spend that money, you don’t get that money. If your seller credits $10,000 and your closing costs is only 9, that 1000 is just, the seller is just going to get to keep that money. You don’t get a check at the end and it cannot go towards your down payment. So generally we try to go a little bit over, so we have some spill-over there on the closing costs, that you’re going to pay that spill over just to make sure we’re making the most of it. Rob, I know that we have also used that for paying out mortgage insurance, which is a whole nother episode, but you can pre-pay your mortgage insurance effectively by buying it out so that it’s not part of your monthly payment. There’s a number of different strategies. You mentioned home warranty. There’s some great ways that if there’s leftover on the table, that should be a discussion with your lender to figure out what’s the best strategy for, specifically, you.

 

Robert Delavan:

Right. And there’s some very simple language that we generally use if we know we’re going to be in that range, where there’s probably more closing cost concessions than we would necessarily use. Let’s say, you know, even with a rate buy down and all of the prepaids of, you know, taxes, insurance and and title insurance and so forth that we talked about in the first part of this episode. It’s only $9,000 and we got, and we were able to negotiate 12, and let’s assume all the repairs in the case. That’s $3,000 that would not, if you write that contract a certain way, that’s $3,000 that you could leave on the table on behalf of, the seller just says “oh, okay, closing costs were only 9. I offered 12, but you didn’t have 12.” So you don’t wanna be in a situation two days before closing where you’re scrambling.

 

Adrian Schermer:

Absolutely.

 

Robert Delavan:

But there’s a very simple language you can use that says, in essence, the closing costs of $12,000 right up front in the event of an overage on closing costs that will not be utilized, a seller agrees to still provide that in some other way, and that basically, and there’s some language cleanup there, that’s not exactly how we say it in the documents. But basically it makes it so that that seller can’t say, “oh, hey, thanks, you didn’t use it so I get it”

Adrian Schermer:

Yeah.

 

Robert Delavan:

So I There’s always things you can do, for example, like repairs or you know upgrades or what have you. So, and Lance, we’ve had those conversations before, you know, with folks that we’ve worked with across the board referrals with all of us, and the last thing you want, although every once in a while there’s a scenario where somebody’s like “you know what? I don’t really wanna buy it down” and they get it down to like maybe a couple hundred bucks and they’ll leave a couple hundred bucks on the table. But you certainly don’t want to leave a couple thousand bucks on the table.

 

Adrian Schermer:

Yeah, yeah, absolutely.

 

Robert Delavan:

So that’s the key.

 

Adrian Schermer:

And so for our audience, I want to just paint this scenario, you know, one last time here. Let’s say we have three houses on a block, right? They are identical houses. They are all, as far as the market is concerned, worth about 350, right? We know that there can be a swing there. So these houses might be able to appraise for more, but that’s what they’re trying to sell these houses for. Now, I own one of these houses and I decide that I’m going to put mine up for 360, but I’m gonna advertise it that I’m giving a $10,000 seller credit. For me, as the seller, that is the exact same amount of money when I get to closing. My check is going to be identical at 360 with a $10,000 seller credit, as it would be at 350 sales price. But for a buyer, let’s say this is a, you know the typical two, three bedroom starter home, someone probably is gonna be buying this with 3% down payment. 3% down on 350 is $10,500. If you give me a $10,000 seller credit, and I’m expecting to pay that in closing cost, you just cut the amount of money that I have to come to closing with in half.

 

Robert Delavan:

Right.

 

Adrian Schermer:

And that’s a huge, huge deal to have another 10,000 bucks, right? You’re moving into your first house. I don’t know, you wanna do some paint. You wanna just have a buffer. You wanna maybe pay someone to move your stuff for you instead of harassing your friends again. It’s such a difference maker, and so we saw that becoming more popular when the market shifted. that people were actually offering it right up front. Hey, I’m on board with the seller credit and I’m gonna help you with that. We also saw it applied to two-one buy downs. This is another whole separate episode. I’m not gonna dig into the meat of what that is, but a two-one buy down basically gives you first year and second year at a reduced interest rate. And there’s no free lunch, right? So we know that there’s a cost upfront for that and that’s probably what’s paying that, but there were a lot of sellers also offering a seller credit to help absorb that cost, and what that meant for the buyers was a lower payment for the first few years of homeownership where you are potentially worried about you know hey is something gonna break? Do I have a nest egg that I need to save back up? I’m spending all my money buying this house, what if something happens two months down the road, and I don’t have a warranty?

 

Robert Delavan:

Right.

 

Adrian Schermer:

This is the kind of thing that can ease one of the biggest stressors for buyers and Rob you hit the nail on the head. I mean we talked about negotiation, one most important things is asking those probing questions and finding out what are the pain points for your potential client here, and for a buyer, especially in a marketplace of what is typically a starter home or a first time buyer typical home, then that’s huge.

 

Robert Delavan:

Yeah.

 

Adrian Schermer:

That seller credit can change, massively change, how easy it is for them to get access to this home.

 

Robert Delavan:

Yeah, and the fun part about this is really where I’ve worked with, you know, on the financial side. It’s all about cash flow. It’s all about, you know, preserving cash for when you need it, having contingency plans, you know, those sorts of things, and basically having a similar message where you’re putting your client in a position where they have margin.

 

Adrian Schermer:

Yeah.

 

Robert Delavan:

And that’s really what these closing costs and concessions for a buyer especially provide, and then for the seller, it’s, hey, if you’re savvy about it, and you’re strategically positioning yourself, your house is going to sell, and the next two in a competitive market for sellers, there’s more sellers than there are buyers so the next two up the street aren’t going to sell, and yours is, assuming the product is the same.

 

Adrian Schermer:

Yeah

 

Robert Delavan:

So that’s where it gets..

 

Adrian Schermer:

and in that example, I gave nothing away. I make the same amount of money. So it can be very brilliantly applied that way.

 

Lance Johnson:

It seems like you actually limit the extra negotiation after the deal because there’s limits on the percentage.

 

Adrian Schermer:

That is also an exce… that’s an awesome point, Lance. Yeah, you’re right. I mean, again, seller perspective, now you can’t wrap in that inspection. We’ve hit that ceiling before. You find something in the inspection, hey, the carpet needs to be fixed. Well, I’m not gonna fix it and hey, you’re at your limit for seller concession anyway, so, sorry, there’s nothing left for me to give.

 

Robert Delavan:

So it gets, there’s a lot of hints and outs on that, and yeah, that’s a great point Lance. It happens quite a bit where it’s just like, well, we can’t really do any more other than this unless you actually go in and replace that, you know, carpet or roof or what have you.

 

Lance Johnson:

Well, this has been a great episode. So give us your final thoughts there, Rob, on this episode.

 

Robert Delavan:

Well, we appreciate you guys listening. A lot of this stuff is high level. I will say that, what do you say Adrian, almost every time? “Your mileage will vary.” Frankly, every single personal situation is different and we have to be very…

 

Adrian Schermer:

Yes,

 

Robert Delavan:

…careful about that, that we’re speaking in generalities.

 

Adrian Schermer:

a lot of nuance here.

 

Robert Delavan:

and concepts. So yeah, it’s gonna be different for everybody, but this is the fun part and there’s a lot of conversations that we end up having specifically with our clients about these concepts. So we do have some exciting future episodes in the works. I think we touched on a couple here. We’re looking forward to having some more guests on the podcast too, so stay tuned for that. And that’s.

 

Lance Johnson:

And I think we’re going to try something a little different where we’re going to try to do a Round Robin type round table with eight or nine different people and get into some meteor issues. So we’re going to try some of that stuff. So we’re excited for this year’s podcast. And we’re really kind of getting into our stride.

 

Robert Delavan:

Yeah, that’s gonna be really fun, especially if we, like you said, get into the meat of it, right?

 

Lance Johnson:

Yeah.

 

Adrian Schermer:

Yeah.

 

Robert Delavan:

So, I’ll finish this up on our websites, Adrian, and let’s sign off here.

 

Adrian Schermer:

Yeah, absolutely. You can catch us on our sites. It’s going to be in the video description. We’re going to have links to our individual sites, as well as The Get Rich Slow Podcast site, where you can also request to be a guest or send us some comments. We love reading through what you folks have to say and what you’re interested in seeing next. That’s also where you’ll find the work cited. We’ve got that realtor.com article that does a pretty good job of explaining some of what a seller credit is and that’s it for us!

 

Robert Delavan:

All right, thank you guys.

 

Lance Johnson:

Thank you guys.

 

 

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