49. HOME SERIES 5 OF 8 – FINANCING THE HOME PURCHASE

Home Series 5 of 8

Adrian   00:02

Hello future millionaires and welcome back to the get rich slow podcast. We’re your hosts, Adrian Shermer, Rob Delavan and Lance Johnson. Good morning, gentlemen.

Rob Delavan   00:11

Good morning, Lon.

Lance Johnson   00:15

I’ve been called a lot of different names but not Lon.

Rob Delavan   00:18

Let’s just say Mr. Brilliant at the basics, not Mr. Late to lunch Lon.

Adrian   00:27

This is part five and an eight part series on the home buying process. We’re going to talk about both ends of the spectrum here and Rob, let’s start off with you. I’m really excited about your news.

Rob Delavan   00:39

So a quick success story for you guys is I actually sold a personal house in the last week and it’s one of those things that you know clients and prospective folks and that sort of thing when real estate brokers start selling houses, the markets hot. So, we could dig into that on a whole another episode. But it was a nice episode. I mean, it was a nice situation where hot market and it was the right move.

Lance Johnson   01:07

Not only a real estate move, but it was also kind of a tax move to really kind of discuss. So, it’s a good story that we can uncover some time.

Rob Delavan   01:19

Yeah, tax and frankly, it was financial planning just as much. So, there’s a lot of moving parts on that one. So, we can unpack, but it was a success, sold, done.

Lance Johnson   01:34

So, upcoming events that are coming, we have the sip and mingle, that’s at our legacy legal office on April 22, between 4 and 6 so people that want to come bring a friend or I think we can host about 75 people, I think there’s about 50. So, we have some room to have, just let us know that you’re coming, get on our website, ROI-fa.com/events.

Rob Delavan   02:03

Awesome, that’ll be a fun one.

Adrian   02:09

If you guys want to find us online, you can jump on the podcast website, the getrichslowpodcast.com. It’s got links to our events site, to our individual businesses sites, you can find us on there and you can contact us if you have want more information after this episode and about this episode, today, we’re going to be discussing financing the home purchase based on some statistics, what we’re pulling from again, we love using this as a source because it’s got a wide range of information. It’s very accurate the National Association of Realtors, this particular stat, we’re going to be getting data from the July 2020 to June 2021. That’s the latest release from them. The information provided gives us an understanding from a consumer level of the trends that are transpiring and that’s really what we’re going to look at zoom out of our own little world and look at big data.

Rob Delavan   03:05

Okay, so the first question, Lance, want to throw this one up to you is based on the statistics from the NAR, which is the association Realtors report that we’ve discussed already and by the way that will be in the show notes and disclosures and so forth for reference purposes. 29% of buyers said that saving for a down payment was the most difficult step in the process. So, just about a third of people, how can you help clients be more prepared for home purchasing?

Lance Johnson   03:41

So, that’s a really good question. There are a lot of different answers to this. So, I’m going to kind of go through a couple strategies and so, it depends on the client, obviously. So, let’s use an example of a Nike Intel client Columbia where they have an ESPP and some are issues or non-qualified stock options. So, when those best or they’re in a position where the clients own them, a lot of times they just stay in a brokerage account that or an account with the company that works with a custodial account and they don’t really have the ability to access and a lot of them don’t want to sell those shares, right because there’s tax well, you can move them to a brokerage account, get a margin, which is a margin loan account, but it’s kind of like a HELOC to house ban you could leverage without selling to put the down payment, especially if your cash flow is good. So, a lot of these strategies I’m going to talk about are always going to be brought back to cash flow taxes and financial planning because we will prepare clients on how they would pay off that down payment or that leverage, people that have dual income earners, they both have 401K is most 401K is have loaning privileges up to 50,000 a piece, right? There are some things and not every bank, not every broker has this ability, but you can do and we want to try to get 80% down and so you can do 80% down with a little bit of leverage…

Rob Delavan   05:30

You mean 20% down, right?

Lance Johnson   05:31

Right, [Inaudible 05:36] if you can come up with that short term 20%, you’re gonna get a better interest rate than if you try to do an 80-10-10 or an 80-15-5 and Adrian knows more about this, but not every broker can do, has that ability and so that, sometimes you get led in a direction that and so or you just put 5% down, but then you’re paying mortgage insurance? Well and so you kind of have to look outside the box a little bit and it depends on if you’re moving to the next home and you’re going to make your current home or rental. So, before you put it up for market of work, put it up for rental, go get that home equity line of credit on your existing house. So, there’s a lot of different ways that you can come up with things to, I don’t want to say game the system, but play the system that gives you the best interest rate, which is what our job is, what Adrian’s job is how do you get the loan to qualify but how do you prepare for these and then at the end of the day, we have to look at cash flow to make sure that you’re not over leveraging, like happened in 0607 that you do, what would happen if you lost a job, do you have good reserves?

Adrian   07:03

I use that same term too and it’s probably a misnomer, game the system, but it’s just playing by the rules and you know, once you know the rules, you should take advantage of what works in your favor and you mentioned margin loans, we also have 401K loans, I see those two, that’s kind of, in a way, a similar product, for lending purposes, in most products in your qualified mortgages, products, your conventional loans and your normal stuff. You don’t have to count the payment on that, if there is one against your, it is part of your debt to income ratio. So, that can be a really cool way to utilize pulling money without really pulling it out of your investments and getting the benefit on both sides.

Lance Johnson   07:48

Yeah, and then there’s other things where sometimes you want to get that cash in your checking and savings, two months in advance of getting qualified. So, a lot of times, that doesn’t happen. So, sometimes just getting everything in order, knowing where you’re going to be, finding out what would happen if one of you lost your jobs, those are all important things so that people don’t get leveraged and you don’t have 07 happening again and that’s very important to us as financial advisors. We don’t want any clients to have to file bankruptcy so that’s not a good play.

Rob Delavan   08:27

And I mean, I guess what I’m really hearing from both of you on this is the key word here is prepare and this is something that you want a takeoff point. It’s not hey, guess what I was thinking, Lance I’m gonna buy a house tomorrow, hey, Adrian, same thing? No, give yourself some runway.

Lance Johnson   08:50

I think you’re gonna buy a house in June, you start planning January, some people don’t really think about it until April comes along after-tax season and you can scramble to get things done, but it’s, it’s not ideal. So, it’s a lot harder. So, Adrian, how do you advise your clients to prepare for the costs associated with financing a home purchase, can you comment on that?

Adrian   09:18

Absolutely, of course, we do a lot of preparation for these episodes and this is one that I had to chew on for quite a while, like most of our answers, it’s a your mileage may vary thing and it really depends on each client’s individual needs. But what a lot of people don’t remember is that there are closing costs associated with a home loan and in a lot, you know this is a national podcast, so we have to appreciate that people are in areas that have very different taxes. I used to write loans nationally when I worked for one of the major national banks and I started in this industry and New York, for example, very high taxes. Taxes are a huge chunk of the closing costs because you’re paying Paying the seller for the remainder of taxes for that tax year that they had paid forward when they paid and then you’re earmarking enough funds typically in an account your account for taxes and insurance to make sure you’ve got enough in there your escrow account. So, in the Portland market where we have especially right in the metro where half million and up homes are not uncommon, a lot of times that’s a $10,000 amount of cash that I’ll recommend, because I like to typically overestimate but your mileage is gonna vary a lot.

You’ve got to run the math for what you’re looking for and as Lance alluded to down payment is another huge factor and I have clients where we sometimes play with different ideas, Lance, I think especially you’re working with as a financial advisor, your typical client has a bit more cash and reserves or they might be going for that second home rather than that first time homebuyer and that answer is just gonna be very different for each person and you even have the ability, not a lot of people know this. But after your offer is accepted, you can change the terms as soon as we come in with a larger down payment, but then midstream and say midstream, but really, in that first week, you want to kind of lock in this sort of stuff because you won’t have too much movement beneath your feet but sometimes we explore those options. Another great example is people who want to improve a home, if you buy a home, especially one that’s got, you’re going to expand the footprint of the house, you’re gonna make some sort of major renovations, you might want to have more of that cash free, so you go with a lower down payment and you’re going to be paying that penalty of having the mortgage insurance on their short term.

But mortgage insurance can be cancelled and again, even sooner than it normally can. The turn times on that reduce when you make major improvements to the home that you can document. So, again, looking at the big picture and just depends on how you want to play the game. Lance again, though, very right, many people, especially when it’s not their first home and they’ve got more capital, or they’ve got equity, that they’re rolling from the home that they’re selling, they’re going from the starter to the we’re going to raise our family home, then hitting that 20% mark has a lot of advantages, not having to worry about mortgage insurance and when that’s going to roll off or what the market is going to do and how long it’s going to take.

Rob Delavan   12:19

And you mentioned taxes and of course different states, that primarily for closing cost is property taxes to be very specific.

Adrian   12:31

We just rolled off our big kick with Sue on our last episode series. So, property taxes, homeowners’ insurance too, you know, we have people who grab coastal homes, the insurance can be much higher than, I’m in a subdivision over here, I pay less than 400 bucks a year and insurance because I can see the emergency room for my window over here. If you got a place on the coast and it’s got a pool on it, you might pay 10 times what I’m paying. So, you’ve got to know for your specific property, how these factors are going to run in.

Lance Johnson   13:02

Yeah, when I look at your situation in a cost we refer to as deeming the system I kind of refer to is like, I’m ready to show up and I want to know if I’m playing hockey or football, I want to know what the right equipment is and you don’t want to show up with hockey skates and you’re gonna play football or vice versa. So, gaming is just planning. So, gaming is really referred to when you’re kind of trying to strategize and backfill and you’re kind of scrambling, preparation and planning is, hey, I’m the ideal outcome based on a certain set of circumstances and I’m just best utilizing the resources I have available to give me the best outcome on a product.

Rob Delavan   13:55

And I would say that’s probably the biggest difference in working with someone who’s typically has experience in a track record. They’re buying a home and they’ve been working with a financial advising team for a while versus it’s the same thing of what you’re creating is that runway, that plan, you’re really actually working towards a goal and putting a piece of that ownership that move up that move down whatever it is that you’re doing. All of those things are taken into account well ahead of time with somebody who’s been working with financial…

Lance Johnson   14:33

One thing is, I mean, so many, it’s a seller’s market. So, you know, sometimes you have to buy a new home remodel it, there’s not that many contingent loans nowadays with multiple homest. So, what ends up happening is you got to get all that in place and kind of figure out and then what happens when things go south, are you prepared? Do you have a backup or served? In my 30 years I’ve only had two clients go into foreclosure and unfortunately, they were real estate agents and because they got over leveraged because they believe that real estate’s the only way you can make money but real estate’s great, but it’s hard to get money out when everything goes south. So, preparation and planning is always helpful is nothing worse than watching a client really fret over and reduce their savings and they’re travelling their lifestyle because their house poor, that’s an awful way to go. It’s just too stressful. So, we try to prevent those things.

Lance Johnson   14:51

All right, Rob, I want to pull you in as well. According to the National Association of Realtors, buyers continue to see purchasing a home as a good financial investment. How do you educate your buyers along the way to make sure that they are getting the best bang for buck?

Rob Delavan   16:05

Well, this is frankly, it’s an easy one, do a good job in the purchase and you get into a price point where you know you’re setting yourself up for time. That’s kind of the canned response; I want to dig into it a little bit more than that. According to the 2021 highlights, which edits page 9 and it’s under financing the home purchase. It specifically says buyers continue to see purchasing a home as a good financial investment. 86% reported that they view that home purchase as a good investment 86% this will be documented below and folks are saying that having a home is part of what they think is being a positive thing for building wealth over time. So, I can’t argue with 86% of people. What I can do is basically set them up as well as possible in the actual purchase and part of that is everything we’ve talked about before on this episode, which is no the numbers have a plan, don’t get yourself into a house poor situation. Know what just because you can’t afford it doesn’t mean you should all have these conversations with the financial advising the tax side, the lending side, so forth, that’s the biggest piece of education upfront of okay, know what you’re getting into, then the best bang for their buck.

When you get into an individual transaction, which that’s where like you said earlier, Adrian, mileage will vary for everybody. You get into individual transaction for a specific person. You know let’s say it’s a client of Lance’s and they’re super dialed in and all of these points and then the actual property that they turn out loving is a total left field renovation, or, man, the price point is very different from the brand on or I mean, there’s so many different things that can happen or that equity line didn’t work out. So, what was their backup to that, getting the best bang for their buck is having contingency plans, Plan A, Plan B, plan C, if this then this and that’s the piece where if you’re going to get a bang for your buck, you need to have resources to tackle when that opportunity comes up. Lance, you said hey, we don’t get very many contingent sales right now in the seller’s market. Well, you’re right, it’s a much smaller percentage, but we have gotten them and when it comes up, when somebody decides, oh, hey, I actually want to stretch because I found that perfect house but it’s actually on a little bit of acreage versus not this instead of a three to five year play, this is now a 20 year play, well what’s that look like?

So, just being able to hey, there’s a property that hasn’t been popular because the finishes just suck, like 1983 called and once it’s Paisley border around the kitchen, you remember those things are right up at the top of everybody, I had one from the 70s and 80s and it’s turning people off but it’s a great house. So, that’s the key is you have to have a plan, you have to have resources, the more resources you have the better bang for your buck you’re gonna get, especially in a competitive market, which we could see a change very soon. I mean, this is spring of 2022, who knows, I mean, none of us have a crystal ball, but interest rates are in the high fours, low fives and six months ago it was very different. So, there’s a lot of different things that need to be considered. But I’m never going to be able to totally wrap up with a bow that answer it goes back to mileage may vary, but I’m telling you, you’re gonna get a hell of a lot more mileage out of having a plan having your taxes dialed and having your lending dialed in just being smart with your finances, which means you have that team that you’re pre-educated. So, that’s the long answer to a medium sized question, sorry guys.

Lance Johnson   20:53

We’re on a roll…

Adrian   21:04

Lance, would you like to see us off?

Lance Johnson   21:07

So, that wraps up our financial for home purpose episode. Please stay tuned our next episode of the 8 part series in the next episode we’ll be learning about home sellers and their selling experience. So, look to our websites for the visual PowerPoint for this and we’ll see you next time.

Rob Delavan   21:32

Thanks so much.