Tag Archive for: how to price

Affordability in Real Estate in 2021 vs 2023 (and Why It Matters)

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$1.2 million of real estate in 2021. How much will it go for in 2023?

The real estate circle of life:

  • Interest rates change affordability.
  • Affordability changes buying power.
  • Buying power changes the profitability of your investments.

Knowing past and future interest rates, affordability, and buying power will help you make informed decisions about your next real estate purchase.

For reference, let’s work out some examples of affordability for real estate in 2021 compared to 2023.

Purchasing Power for Real Estate in 2021 for $1,000 Payment

If we had a buyer who could afford a payment of $1,000 today, they could buy a $150,000 home. 

Just a year ago, buyers could get interest rates at 3% or lower. So in 2021, this buyer would have a purchasing power of $252,000.

That same buyer, in 2023, is anticipated to have a purchasing power of only $124,000.

Purchasing Power for Real Estate in 2021 for $5,000 Payment

If another buyer was going to buy a $750k house in 2022 at a 7% interest rate, what was their purchasing power in 2021?

For the same $5,000 payment, someone in 2021 could afford a $1.2 million house! In 2023, that payment could only get a $620,000 property.

How Affordability Impacts Sellers

As an investor, it’s wise to keep this reality in mind: 

In a matter of two years, someone can go from being able to afford a $1.2 million house to a $600,000 one. 

With no change in income. No change in qualifications. No change in credit score. The only change is how interest rates impact payment.

Although affordability changes so drastically in a short amount of time, mindset does not. People will still expect the quality of their previous higher price point while they’re looking at homes in their current lower price point.

In addition to focusing on the numbers of your flip, you also have to obsess on quality. If buyers don’t see the quality they expect, they’ll either stay in their current home, or find another property on the market that won’t need any fixes.

Read the full article here.

Watch the video here:

https://youtu.be/-Q_jNTQQzyo

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How To Calculate Affordability in Real Estate Investing

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Home prices are decided by what buyers can afford. Here’s how to calculate affordability. 

As an investor, you have to understand where prices are now and where they’ll be in a few months. 

If you buy a property now, then 4 to 6 months from now is when you’ll either be selling as a flip or appraising for refinance.

For medium-priced homes and below, purchases are mainly based on affordability. Interest rates dictate affordability. Affordability dictates the value of homes.

So let’s look at the numbers. We’ll use an example of a homebuyer who can afford a $1,000 monthly payment right now at the end of 2022.

How to Calculate Affordability – The Payment

Affordability is the monthly payment a buyer can afford. This number is determined by:

  • The buyer’s financial comfort.
  • The income and budget of the buyer.
  • And most importantly: the lender’s qualification requirements.

Many buyers would feel comfortable paying a higher monthly amount, but they’re restricted by their lender. Affordability is a major factor in the loan approval process. Buyers in the mid- to low-price range only get approved for one monthly number, regardless of market conditions or property values.

How Affordability Changes Buying Power – The Price

Interest rates are currently at a 7% average. Only being able to afford a $1,000 payment, this buyer could qualify for a $150,000 home. The $150k is their “purchasing power.”

But interest rates are expected to increase to 8% next year. What happens for this buyer then?

When interest rates rise, purchasing power falls. This buyer still only qualifies for a $1,000 payment, but at an 8% rate, they can only afford a $136,000 house.

What if rates rise to a whopping 9%? Buying power for this buyer decreases to $124,000.

A $124,000 house with a $1,000 payment may not be realistic in many markets today. You have to see what the current environment is in your area, and base your numbers on current interest rates and property values.

How Affordability Impacts the Seller

Affordability doesn’t just impact the buyer; it should also change your expectations as a real estate investor. With higher interest rates, affordability will drop. You have to take this into account when you’re buying properties in this market.

If you buy a house right now in the 7% market, you expect it to sell for $150k. However, you need to keep changing interest rates and affordability in mind. In 6 months when you’re ready to sell, interest rates may be at 8% and your list price will sink to $124k.

Each time interest rates rise by 1%, prices drop by a little over 9%. When interest rates go up 2%, there’s a 17.3% drop in values.

Rates when you’re buying matter less to price than rates when you go to sell. You need to anticipate where rates will go. If rates rise 1-2%, you have to account for affordability.

This balancing of affordability and buying power is one of the biggest factors in home pricing. The majority of people buy based on payments and affordability. Their payments are not going to change despite price changes.

Read the full article here.

Watch the video here:

https://youtu.be/-Q_jNTQQzyo

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This Is How To Determine Home Prices in 2023

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Where is buying power going? How do you determine home prices in 2023?

This is the perfect time to start real estate investing. Great properties are available. …As long as you understand how to price them for the current market.

The good news is, real estate prices aren’t a complete guessing game. Supply, demand, and other circumstances do factor in. Ultimately, however, everything consumers buy is based on affordability, not necessarily price. 

For example, someone who could afford a $10,000 car could also afford a $30,000 car – as long as the financing worked out to be the same monthly payments.

Let’s go over the simple math of how this idea of affordability affects real estate, especially in 2023.

How to Determine Home Prices in 2023 (and Payments!)

As an investor, you have to understand where prices are now and where they’ll be in a few months. If you buy a property now, 4 to 6 months from now is when you’ll either be selling as a flip or appraising for refinance.

For medium-priced homes and below, purchases are mainly based on affordability. Interest rates dictate affordability. Affordability dictates the value of homes.

So let’s look at the numbers. We’ll use an example of a homebuyer who can afford a $1,000 monthly payment right now at the end of 2022.

Affordability – The Payment

Affordability is the monthly payment a buyer can afford. This number is determined by:

  • The buyer’s financial comfort.
  • The income and budget of the buyer.
  • And most importantly: the lender’s qualification requirements.

Many buyers would feel comfortable paying a higher monthly amount, but they’re restricted by their lender. Affordability is a major factor in the loan approval process. Buyers in the mid- to low-price range only get approved for one monthly number, regardless of market conditions or property values.

Buying Power – The Price

Interest rates are currently at a 7% average. Only being able to afford a $1,000 payment, this buyer could qualify for a $150,000 home. The $150k is their “purchasing power.”

But interest rates are expected to increase to 8% next year. What happens for this buyer then?

When interest rates rise, purchasing power falls. This buyer still only qualifies for a $1,000 payment, but at an 8% rate, they can only afford a $136,000 house.

What if rates rise to a whopping 9%? Buying power for this buyer decreases to $124,000.

A $124,000 house with a $1,000 payment may not be realistic in many markets today. You have to see what the current environment is in your area, and base your numbers on current interest rates and property values.

Affordability and Buying Power Impact the Seller

Affordability doesn’t just impact the buyer; it should also change your expectations as a real estate investor. With higher interest rates, affordability will drop. You have to take this into account when you’re buying properties in this market.

If you buy a house right now in the 7% market, you expect it to sell for $150k. However, you need to keep changing interest rates and affordability in mind. In 6 months when you’re ready to sell, interest rates may be at 8% and your list price will sink to $124k.

Each time interest rates rise by 1%, prices drop by a little over 9%. When interest rates go up 2%, there’s a 17.3% drop in values.

Rates when you’re buying matter less to price than rates when you go to sell. You need to anticipate where rates will go. If rates rise 1-2%, you have to account for affordability.

This balancing of affordability and buying power is one of the biggest factors in home pricing. The majority of people buy based on payments and affordability. Their payments are not going to change despite price changes.

Home Prices in 2023 for a Higher Price Point

To show how affordability and buying power work at any price point, let’s go over an example with a $750,000 property.

If a buyer was looking at a $750k home in 2022 at a 7% interest rate, their payment would be $4,990. Their affordability (the monthly payment they’ve qualified for) is $4,990. So if interest rates change, the home price they can afford will go down.

For example, if rates go to 8%, their buying power drops to $680,000.

At 9%, they can only afford a $620,000 house. 

Make sure you understand where rates are projected to be in the future. The profitability of both flips and rentals are dependent on these rates.

As of right now in late 2022, rates are expected to continually increase – potentially up to 9-10%.

Comparing Home Prices in 2021 – 2023

Knowing past and future interest rates, affordability, and buying power will help you make informed decisions about your next real estate purchase.

For reference, let’s work out some examples of purchasing power for a homebuyer in 2021.

Purchasing Power in 2021 for $1,000 Payment

If we had a buyer who could afford a payment of $1,000 today, they could buy a $150,000 home. 

Just a year ago, buyers could get interest rates at 3% or lower. So in 2021, this buyer would have a purchasing power of $252,000.

That same buyer, in 2023, is anticipated to have a purchasing power of only $124,000.

Purchasing Power in 2021 for $5,000 Payment

If another buyer was going to buy a $750k house in 2022 at a 7% interest rate, what was their purchasing power in 2021?

For the same $5,000 payment, someone in 2021 could afford a $1.2 million house! In 2023, that payment could only get a $620,000 property.

How Purchasing Power Impacts Sellers

As an investor, it’s wise to keep this reality in mind: 

In a matter of two years, someone can go from being able to afford a $1.2 million house to a $600,000 one. 

With no change in income. No change in qualifications. No change in credit score. The only change is how interest rates impact payment.

Although affordability changes so drastically in a short amount of time, mindset does not. People will still expect the quality of their previous higher price point while they’re looking at homes in their current lower price point.

In addition to focusing on the numbers of your flip, you also have to obsess on quality. If buyers don’t see the quality they expect, they’ll either stay in their current home, or find another property on the market that won’t need any fixes.

Buying Now to Sell at the Home Prices in 2023

Going forward in 2022 and 2023, you need to look at affordability. The US buys on payments, so your prices need to be adjusted to buyers’ affordability.

If you have any questions on how to price properties, or have a deal you’d like us to look at, reach out. Email us at Info@HardMoneyMike.com. 

And be sure to check out our YouTube channel for more information on real estate investing.

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How Dropping Listing Price Hurts a Refinance

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Here’s an example of just how much dropping listing price hurts a refinance.

A recent client of ours came across a common issue in today’s market:

He got caught in the market with a big flip project. After weeks on the market, he just couldn’t sell. Negative cash flow pushed him to continually drop his asking price.

Here are the numbers of his deal and what happened to his chances at a refinance.

How Dropping Listing Price Hurt a Refinance

This client listed his property in late July, early August of this year. Everything had been going well for his investments in the last 7 or 8 years, so he took his time on a couple recent flips. But it took him a little too long on this one, and the timing is now killing him.

Let’s look at his numbers.

The First Price

This client owed $425,000 on the loan for this property. His initial listing price for was $769,000.

So far, so good. These numbers are great. He has a low loan-to-value. Sixty-five percent is a major threshold for LTVs. Being under 65%, this would be a great position for a refinance.

He would have had a lot of options available to him at this point, even if his income didn’t suffice for a conventional loan.

Price Drop #1

A couple weeks later, like most people would do when their property hasn’t sold, he decided to lower the price.

The new price was $725,000. His LTV crossed the threshold to above 65%.

Although not as great as before, he still would have plenty of loan options. Everything still looking good.

Third and Fourth Price Drops

One week later, he decided to drop price again. His realtor talked him into dropping below $700,000.

Now at $699,800, he’s lowered the price three times. When the appraiser looks at this, they’re going to see the continual drops, making it clear that the property is not selling at these prices.

Eight weeks in, this client started getting desperate. Remember, he’s making monthly payments on this property. The house has a high negative cash flow. So he drops the price to $649,000 in hopes of selling.

He’s crossed another major LTV threshold into 70-75%. He’s created a big hurdle for refinancing by dropping the property 4 times over the last 8 weeks.

Dropping Listing Price Hurts Refinance

The appraiser will see the property isn’t selling at $649,000. So based on the current market rates, they’ll appraise it 1-10% less than that number. With this low appraisal, our client could get trapped above a 75% LTV. Getting a decent refinance loan just became way harder, with a nearly guaranteed negative cash flow.

The LTV has gone up, so now his refinance rates will go up. Additionally, he’s backed into a corner where he’ll need a higher credit score to get the loan. At a 65% LTV, there are options for almost any credit score. At 75%, you need a much higher score to get anything.

Every time you drop the price, you’re putting yourself at a higher risk of a worse rental refinance loan. Dropping price gets you lower LTVs, worse cash flow, and potentially takes away the option to refinance altogether.

Read the full article here.

Watch the video here:

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How to Price a Flip in 2022’s Real Estate Market

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With rising interest rates, homes aren’t valued like they used to be. Here’s how to price a flip in the current market.

As a real estate investor with a fix-and-flip, it’s tempting to fixate on purchase price. Why aren’t buyers throwing themselves at your door with your listing price?

You have to remember one simple reality: People buy based on payment.

When interest rates change, the monthly payment people can afford doesn’t. This results in buyers’ available price points dipping lower and lower.

People might be willing to pay a little more per month for a higher purchase price in this market. But that doesn’t matter if they can still only qualify for a loan with the original lower payment.

Let’s look at a real example from one of our recent clients about how they need to price their current flip.

Interest Rates Impact How to Price a Flip

Back in January, our client’s property would have sold for $800,000. That number was still on their mind as they brought the house to market a couple months ago.

However, back then, the interest rate would have been around 4%. This would have made the property’s monthly payment around $3,800.

Fast forward to now. If people are buying properties based on payment… Could this client still sell for $800,000?

The problem is: interest rates are now closer to 7%. 

Let’s look at how this impacts payment. If someone could qualify for the $3,800 payment back in January… then they qualified for that payment, not necessarily that purchase price.

If the target buyer can only budget/qualify for $3,800, then in order to keep that monthly payment with a 7% rate, the new price will need to be $575,000.

Why Is It Important to Know How to Price a Flip?

This client’s main motivation is that they want to clear off properties like this because they know better deals are coming. They need to be free to buy soon without past flips hanging over them.

Another motivation is: they don’t want to keep making payments on a property that will sell for even less in a year.

Next year, experts anticipate interest rates will be up to 8%. Affordability for this property would go down to $520,000. This client certainly doesn’t want to be caught with this property for sale in that market.

How a Buydown Impacts Your Listing Price

You end up with two main strategies regarding how to price a flip in this market:

  1. You can lower your price to make the monthly payment the same for the buyer, based on interest rates.
  2. You can buy down the rate for your buyer.

A buydown is a strategy where the seller pays in advance to bring down the interest rate for the buyer.

In our previous example of the $800,000 property, our target payment would be $3,800/month. What would the purchase price be if we took the 7% interest rate down by a percentage point? Could that get us closer to $3,800 without sacrificing as much purchase price?

Let’s say it would cost 2 points to bring the interest rate down to 6%. That interest rate would allow you to sell at $640,000, while still keeping the buyers’ monthly payment at $3,800/month.

Buying down the interest at a cost of 2 points would only cost you $12,800. Yet even with that buydown cost, you’d still make an additional $52,200 selling at $640,000 (compared to the $575,000 pre-buydown).

It becomes a win-win: the buyer can qualify for the $3,800/month payment, and the seller can ask for a higher price.

How to Price a Flip at a Lower Price Point

This example covered a higher-end, $800,000 house. Does all this math work the same at a lower price point?

Let’s look at a $250,000 instead.

At the beginning of 2022, a $250,000 house would have cost a homeowner $1,193/month. Now, that same house would cost the same person $1,663. That’s $470 more per month, or a 39% increase. From early 2022 to early 2023, the monthly payments will have gone up by 54%, to $1,834/month.

These numbers are still probably cheaper than rent for a comparable property. However, that doesn’t necessarily mean buyers will be able to qualify with lenders.

If someone could buy a $250,000 house at the beginning of 2022, now the same exact person could only afford $180,000. By next year, they can only afford $162,000.

This is why properties are sitting on the market. When prospective homeowners buy by payment, they can only afford 30-40% less in purchase price.

Buydown at $250,000

What if you try the buydown technique here?

If you paid 2 points, you could bring the interest rate down to 6%. This would cost you $4,000, but allow you to sell for $200,000. You’d net $16,000 more than if you were to sell at $180,000.

Sometimes, it’s not about price for the buyer. Many homebuyers are payment-motivated shoppers. Instead of lowering the price, try getting your buyer’s payment in line.

If Selling a Flip Isn’t Right for You Right Now…

Once you learn how to price a flip, you can try lowering price to accommodate buyer payments, or you can try a buydown strategy.

Or, if you have a property sitting with a hard money loan, maybe it’s time to refinance into a rental. Maybe it’s time to take the property off the market, instead of continuing to drop the price. Every time you drop the price, it hurts your appraised value.

We can help you with a DSCR loan or a traditional loan.

Reach out if you’d like us to price out a property and see if we could provide you a loan. 

Send us an email at Info@TheCashFlowCompany.com.

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