What's a home really worth? Not emotionally or psychologically, but in cash, today, at this moment?
I ask because a letter from a reader raised this question in an interesting and important way -- a way which has national impact.
My husband and I are first time home buyers. We will be closing on our condo this Friday, and just found out that the final closing costs are less than the sellers concession amount. My question is: Where does the extra money from the seller concession go? I know that the buyer is not supposed to get any cash back from the seller (we are okay with that), but then the extra money will go to the seller? I don't think the seller should get that money because we added the seller's concession amount on top of the original value of the property (we offered 239K for the condo + 11K seller's concession). Can we add other expenses such as initial association fees, or home repairs?
On one level, the answer to the question is that who gets the $11,000 depends on what the contract says. For instance, there's a difference in an agreement which says a seller will pay "up to" $11,000 in closing versus language which says the buyers will simply get an $11,000 credit at closing.
But on another level, the letter asks: What's the property worth? What's its fair market value?
The writer says they bid $250,000 -- $239,000 for the property plus $11,000 for the "seller's concession." If this accounting is correct then there was no concession for $11,000. Instead there are postponed costs in the form of a higher monthly mortgage expense, larger property tax and insurance bills (because the property is more expensive than $239,000), and a higher financial hurdle when they sell.
Let's say the property was offered for sale at $239,000 and the purchase was financed with a 30-year mortgage at 6.25 percent and nothing down. The monthly payment for principal and interest would be $1,472.
However, the property actually had a $250,000 purchase price. With the same loan terms, the monthly cost for financing will grow to $1,539 -- an increase of $67 a month or $804 a year.
Is this a big deal? Is anyone hurt by this arrangement?
It's not a big deal if the property has a $250,000 fair market value and the buyers can afford the additional monthly cost, some of which is tax deductible. But what if they're buying on the edge of affordability, like so many first-time purchasers? What if someone loses a job, some overtime pay doesn't come in or there's a costly accident or medical emergency?
If the property must be sold or if it goes to foreclosure, then the buyers can have big problems if they bought above fair market value. In that case, with a sale the preimum-plus property the owners would then be competing with sellers who did not pay an extra $11,000 and can thus offer their properties at a lower cost without a loss. As to a foreclosure, if the property was purchased with 100-percent financing, then between the above-market price, full financing and a possible "foreclosure discount" the lender, mortgage insurer or both are likely to take a financial beating.
HUD is distressed at the idea of purchases above fair-market value that involve FHA mortgage insurance because if something goes wrong then FHA must compensate the lender. HUD is now proposing regulations that would limit if not eliminate the ability of third parties such as the Nehemiah program to provide down payment money.
With Nehemiah, a seller provides a contribution of up to 6 percent of the sale price to the nonprofit group. Nehemiah, in turn, provides a grant to the buyer of equal size. The seller also pays a $499 processing fee. No money from Nehemiah goes to pay off credit cards, auto debt, etc.
Help from Nehemiah and similar groups would not be necessary except that HUD requires buyers to provide 3 percent down payment money or to get it from friends, family, work, a union, a community group, etc. -- but not from a seller. Amazingly, FHA rules do allow owners to make as much as a 6-percent seller contribution to offset closing costs and repairs -- but no money can go to the down payment.
"FHA's primary concern with these transactions is that the sales price is often increased to ensure that the seller's net proceeds are not diminished, and such increase in sales price is often to the detriment of the borrower and FHA," says HUD in its proposal to cut off buyer down payment help from charitable groups.
But the Nehemiah program has been enormously successful. Writing in the Louisiana Weekly , Scott C. Syphax, President and CEO of the Nehemiah Corporation of America, says that since 1997 his program has helped "229,000 families purchase their first homes across every state in the country and has given out almost $900 million in grants without receiving a single dime from either government or foundations."
There are really several issues here.
First, does it then make sense to limit or end a program which is successful? What alternatives does HUD offer?
Second, imagine the impact on home values if we didn't have 229,000 buyers in the past decade. How many billions of dollars in home sales would be lost? How many neighborhoods would see declining home values? Imagine the impact on the FHA program. Nehemiah is doing the work the government says it wants done: It's a faith-based initiative with an outreach to minority borrowers.
Third, HUD has a good point in thinking that sale prices might be raised above fair market values to include seller concessions. But worries about over-pricing apply not only to 3-percent down payment assistance, they also apply to 6-percent seller contributions -- a practice which HUD accepts. If HUD wants to get rid of down payment help it should logically be in favor of getting rid of seller contributions.
The answer to over-pricing concerns is not to worry about programs such as Nehemiah, instead the solution is to look at the appraisals HUD requires for all FHA-backed loans.
Surely local and licensed appraisers can determine if a home is being sold for more than fair market value; surely appraisers can see if a sale price is higher than the last asking price for a property; and surely appraisers can document if a higher price is or is not justified in the marketplace.
Once there's an independent and accurate appraisal, the problem for lenders and HUD is easily resolved with an old underwriting standard: Lenders will provide financing based on the sale price of the property or the appraised value -- whichever is less.
For more articles by Peter G. Miller, please press here .
