With Terry Story, 28-year veteran Real Estate Agent with Coldwell Banker in Boca Raton, FL
Student Loan Cash Out Refinance
This week in Real Estate Round-up, Steve and Terry discuss an exciting new development whereby students can pay off higher interest rate student debt by borrowing money against lower-rate home mortgages. Effective immediately, Fannie Mae will make it easier for borrowers with student loans to qualify for a home loan. Homeowners will also be able to pay down student debt by refinancing their mortgage through a “Student Loan Cash-Out Refinance.”
As Steve clarifies, you’re switching your student loan into your home mortgage but warns that there are some downsides. For instance, student loans are unsecured, whereas your mortgage is secured. So, if you don’t make mortgage payments, you could lose your house. Student loans, on the other hand, offer greater flexibility on repayment, such as loan extensions if you run into financial trouble. So, a student loan cash out refinance carries some risk, though paying a lower rate on student debt works out better in most cases. Steve adds that this cash out refinance is also tax deductible for most people.
Best Florida Cities To Flip Homes
Next, Steve focuses on Florida cities that were ranked in a list of 2017’s Best Place to Flip Houses. Tampa tops the state’s list with a #6 ranking on the overall U.S. list and is the only Florida city in the national top ten. Next, there’s Orlando at #16; Pembroke Pines, a suburb of the west Fort Lauderdale area, at #24; St. Petersburg, at #36; Cape Coral at #51; Jacksonville at #55; Fort Lauderdale at #84; and Miami at #110. Tampa and Orlando were the two best in Florida and only the Seattle and Atlanta areas have more places on the list than Florida.
The Gap Between Appraisals And Market Price
Switching to first-time homebuyers in a rising market, Steve says appraisals for a home never really match up with what the market prices the home at, which causes problems for first-time homebuyers. Terry says she sees this happening too, where banks often appraise homes at less than what they can sell for in today’s tight housing market, causing sales to fall through or burdening non-cash buyers in other ways.
She presents an example: Say a buyer agrees to pay $300,000 for a house, but the bank appraises it for only $280,000. The buyer must then put down the additional $20,000 from his own pocket to make up for the shortfall or risk having the sale fall through. And the reason this gap is hurting first-time, especially low-income buyers, is that they usually don’t have the cash to make up that shortfall. Sellers are not interested in accepting such appraisal-linked offers and often sell for cash, even if it’s slightly less money.
In a rising market, Steve attributes this gap to appraisers looking at comparable homes that sold four to six months earlier and not factoring in the price rise in the months since. The reverse happens in a falling market, where homes are appraised for more than what buyers are willing to pay.
And while the buyer can get another appraiser, Terry says you have to start with a new lender and most sellers will not wait around.
Whole Foods’ Effect On Home Prices
Steve cites a new study which finds that real estate investors should look for homes close to Whole Foods, Trader Joe’s, or the German grocery store, Aldi, for better future price appreciation. Homes near Whole Foods saw strong price appreciation, with this only likely to get better with Amazon’s plan to buy Whole Foods. If you have a Whole Foods or Trader Joe’s in your area, it may signify a more upscale, hipster, or desirable neighborhood, so prices could rise faster, especially if these stores are within walking distance to the home.
The study shows that homeowners near Trader Joe’s have seen a five-year home price appreciation average of 67%, compared to 52% near Whole Foods and 51% near Aldi.
The next time you’re looking to buy a home, factor in the appraisal gap, and see if there are hipster or upscale stores or cafes near the home.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: It’s time for Real Estate Round-up. This is the time every single week we get together with noted real estate agent, Terry Story. Terry is a 28-year veteran with Coldwell Banker located in Boca Raton, Florida. Welcome back to the show, Terry.
Terry Story: Thanks for having me, Steve.
Steve Pomeranz: Hey, this is new. People with student debt now may be able to roll that student debt into a mortgage when they buy a house. Wow, tell us about that.
Terry Story: I know, yeah, it’s exciting. Beginning immediately, Fannie Mae is expanding their cash-out refinances. That’s going to allow borrowers to use lower interest rates,
Terry Story: Equity in their homes to pay off your higher interest rate student loan debts.
Steve Pomeranz: Yeah, so if you-
Terry Story: So, you’re basically rolling it in.
Steve Pomeranz: Yeah, so if you’re paying 4% on your mortgage and your student loan debt is 6%, they can allow you to cash out and pay off your student mortgage.
And, in effect, you’re switching your student loan into your home mortgage, which is pretty cool, but it’s got some downsides. And I want to talk about that in a second.
Terry Story: That’s right, yeah.
Steve Pomeranz: So, don’t forget that student loans are unsecured loans, whereas your mortgage is secured. So, if you don’t pay the loan, you could lose your house.
Terry Story: Right, exactly.
Steve Pomeranz: [CROSSTALK] that’s dangerous.
Terry Story: And that’s the risk.
Steve Pomeranz: Yeah, and the other thing, too, is that student loans are somewhat flexible; the repayment schedule is somewhat flexible. So, if you run into some financial trouble, you can kind of extend the payment, pay less. But in a mortgage, you better pay your mortgage.
That’s it, you’ve got to pay your mortgage. So, that lack of flexibility with a mortgage may hurt you if times get a little rough.
Terry Story: Exactly, so it’s an individual case-by-case situation if this is something that would work better for you. But, certainly, paying a lower interest rate, I would find very attractive.
Steve Pomeranz: It’s also tax deductible.
Terry Story: That’s true.
Steve Pomeranz: For most people.
Terry Story: That’s a good point.
Steve Pomeranz: So you provided me some information about the best cities in Florida to flip a home, what are they?
Terry Story: Well, in Florida, what we’re looking at, Steve, is Tampa as being number six on the list, followed by Orlando as number 16. In more our local market, we’ve got Pembroke Pines, which is kind of a suburb of the west Fort Lauderdale area. St. Petersburg, that’s ranked number 36, and then it goes all the way to 51 at Cape Coral, 55 at Jacksonville.
Steve Pomeranz: Where’s Miami on this list here?
Terry Story: Miami is number 110, so that’s not really a real hot spot. Really, Tampa and Orlando were the two best in Florida. And only Seattle and Atlanta have more places better than what we have here in Florida.
Steve Pomeranz: I had an associate who was buying houses in Tampa and remodeling them and a lot of them really needed a lot of work. And he was very successful at that, he did a very good job. And then he held them for a couple years, and then he’s been selling them. So, I know that a few years ago that was a really good market, and it’s interesting to see it on this list once again.
All right, let’s talk about first-time homebuyers. A lot of our discussion over the years, Terry, has been about this fact that appraisals for a home never really match up with what the market is actually stating a home is worth.
Tell us about that problem and how it’s affecting first-time homebuyers now.
Terry Story: Sure, well, we’re seeing it again now. As the market increases, the homes…when you buy a home and there’s a mortgage involved, the bank goes in and appraises it. And the home has to appraise in order for the lender to lend you the money.
Now, if there is a shortfall, let’s say, for example, you sell the house for 300,000 and it appraises for 280,000. The buyer always has the option to put down an additional $20,000 to make up that shortfall. But what we’re saying here, it hurts. And the reason why it’s hurting first-time home buyers is they don’t have, usually, the cash to make up that shortfall. So, for example, here’s a story where there are 22 offers. Well, you may have been somebody who really wanted the house and you were willing to pay 325,000 for it. But if it doesn’t appraise and you can’t come up with that shortfall; the seller’s not interested in even accepting your offer.
So, a seller, in many cases, will take a cash offer that was for less money because they know that they’re not going to have to deal with this appraisal issue. I just had this happen the other day, I sold a house for 670,000. I had another offer on it for 675, the first deal fell apart. Had nothing to do with the appraisal; the buyer just walked away. But when I went to appraise the home, it came in a lot less. It came in around 650, and because the seller wasn’t in a position to try to fight it and argue it—because you have to pretty much get a new lender, get a new appraiser—
the seller went ahead and accepted this offer for $25,000 less when I know for sure I could’ve sold it again if we went to a different appraiser or different buyer for more money.
Steve Pomeranz: Yeah, so-
Terry Story: So, this is what we’re seeing. This is reality in a market where the prices are rising.
Steve Pomeranz: Well, we were talking about that. And that is the phenomena here, is that when prices are rising, there’s always a lag because they’re looking at comps, comparables, for houses…what?—sold in the last six months?
Terry Story: Yeah, they look back about six months.
Steve Pomeranz: Right.
Terry Story: And there is a lag.
Steve Pomeranz: There’s a lag, so your prices are rising now. But it’s not showing up in the comps because it includes homes that were sold six months ago, five, four months ago. So, there’s a lag when prices are rising and it’s the reverse when the prices are falling, as well.
Terry Story: That’s right.
Steve Pomeranz: So, it’s really an issue now, can you go and get another appraiser?
Terry Story: Well, you can, but you have to start with a new lender-
Steve Pomeranz: A new lender.
Terry Story: In many cases and not 100%. But for the most part, you have to start with a new lender.
Steve Pomeranz: Okay.
Terry Story: They won’t let you just change an appraisal when you’re already working with a specific lender. Again, that’s not 100%, but in most cases. Terry Story: Yep.
Steve Pomeranz: Terry, here is something that’s extremely interesting that I saw. Real estate investors should look for homes close to Whole Foods or Trader Joe’s or the German grocery store Aldi for better pricing, for better prices or future appreciation. What’s that all about?
Terry Story: Yeah, it’s kind of a crazy study, but homes near Whole Foods have seen stronger home-price appreciations recently, a higher increase than Trader Joe’s or Aldi. Real estate investors who want to try to maximize a return via flipping should check out these neighborhoods, which I think is kind of crazy, I’m not sure what the correlation is.
What came first, the houses in the neighborhood or the stores?
Steve Pomeranz: Well, that’s true, I mean, I guess if you have a Whole Foods in your neighborhood that may signify that it’s a bit of a more upscale neighborhood and prices may be rising.
Terry Story: Right.
Steve Pomeranz: So it’s not necessarily a correlation. But it is interesting that also maybe being within very short driving or walking distance of these stores may add to the value in some way. Though, this day and age, with everybody purchasing a car-
Terry Story: Yeah, I mean, like here, for example, it says homeowners near Trader Joe’s have a five-year home appreciation average of 67% compared to 52% of homeowners near Whole Foods and 51% near Aldi.
Steve Pomeranz: Okay, well, I don’t really know what Aldi is. But I know it’s a very popular German grocery store that actually has recently announced they’re going to do a major expansion in the United States. Be that as it may, we are out of time.
My guest, as always, is Terry Story. She’s a 28-year veteran with Coldwell Banker located in Boca Raton. And she can be found at terrystory.com, thanks, Terry.
Terry Story: Thanks for having me, Steve.