Tuesday, July 30, 2013

Please build my home. I just don't trust you with my money.

Please build my home.  I just don’t trust you with my money.

When building a new home, different states have different rules regarding your down payment.  Here in the sunshine state of Florida, builders are obligated to give buyers the option of either having the builder just keep the deposit, or requiring the builder to place the funds into an escrow account.  This sounds like a no-brainer, right?  Put the money into an escrow account.  I know what you are thinking.  It is my money.  Why do I want the builder to have it?  This is the easiest no-brainer since the microwave.  Why are you even wasting our time with this blog (well, let’s not go that far). 

Actually, the decision is not as easy as you may think (hence the reason for the blog).  First, you have to ask yourself how comfortable you are with your builder.  Are they a financially secure company?  For public companies, this is fairly easy information to find out.  For private companies, it is most likely a bit more difficult.  However, you need to decide if you are comfortable with your builder’s ability to perform.  Second, does the builder construct a quality home?  Are you comfortable that the home that is proposed to be delivered to you will meet your expectations and be in accordance with the builder obligations as represented to you and as stated under the contract.  The reality is that if you do not answer yes to both of these questions, you should probably not be buying the contemplated home anyway.

Let’s move on and assume that the builder is financially rock solid and that they build a high quality home, as all builders should.  Let’s now readdress the matter of the deposit.  If you are so inclined to have these funds placed in escrow, you need to understand that you may very well incur certain costs by taking this action.  For funds placed in escrow, the builder will typically have the ability to borrow against these funds and to charge you for the cost to borrow against these funds.  Now, these builder rights will need to be stated in the contract to be valid, which every builder worth their nail gun will make sure that they have done.  Depending on the size of your deposit, this could potentially cost you a couple of extra thousand dollars.  And for what?  If you have selected your builder properly, there should be no concerns about what you are buying.  You may have just as well have allowed the builder to keep the deposit up front.

Let’s take a further look at the deposit.  The amounts requested may vary from builder to bullder, but let’s assume that you are required to put down 10% on a home at the time of contract execution.  Let’s assume your home costs $300,000, requiring a $30,000 deposit.  You may choose to let the builder keep the deposit to avoid the risk of incurring borrowing costs on that money.  However, there may be an opportunity to actually make some money if you are willing to give the builder a greater deposit.  As with any business, builders will have a cost of capital.  This cost of capital will often be greater than the marginal interest rate that you can earn by keeping your money in the bank.  There may be times and there may be builders (I know there are some) that will give you a discount on the home purchase for additional cash you are willing to pay up front as an additional deposit on the home.  For instance, let’s say you plan to pay 20% of the home purchase in cash at closing and finance the remainder.  In our example, that will require an additional $30,000 at closing.  Some buyers may be willing to pay 3%, 4% or even 5% on that additional $30,000 if you are willing to pay that as an additional deposit up front.  Remember, you are reducing the builder’s borrowing costs by giving them more money sooner, rather than later.  (Side note:  More money is better than less money and sooner is better than later.  I learned that in business school.)  So, if it takes six months to build your home and a builder is willing to pay you 5%/annum on your additional deposit, you would receive a closing discount of $750 on your home due to your increased deposit.  Not bad versus just letting the cash sit in a bank account until closing.

I understand that this goes against conservative thinking.  However, remember that a home is an investment.  That makes your builder part of that investment.  If you are willing to invest wisely, you may be able to avoid unnecessary additional home purchase expenses and, in fact, may be able to actually reduce the final cost of your dream home.

Until next time…

Keep kicking the dirt!



Thursday, July 25, 2013

Neither a borrower, nor a lender be...

Neither a borrower, nor a lender be…
Congratulations, you have decided to buy a home.  Not just any home.  You have decided to buy new.  You have decided that you don’t want to deal with re-painting, replacing floors and appliances and you have just fallen in love with that new model by the big national builder in your neighborhood.

You also feel good because you have a decent deposit you can put towards the purchase.  However, you do still need a mortgage and are a bit worried about where to turn.  In fact, your builder has been pressing to convince you to use their own mortgage company.  They may have even provided some incentive for you to use them.  But you are concerned.  You are looking forward to them building your house, but they are builders, not lenders.  Banks are typically lenders.  You know banks and have been dealing with them for years.  Also, it feels like something may not be right when the builder is trying to give you something extra just to use their own lender.  You are also probably wondering if they are giving you a competitive rate.  If you are reading this and slowly nodding your head, hopefully in agreement, not because you are falling asleep, then read on!

Your first inclination may be to say thanks but no thanks.  You are comfortable with your local banker or your financial planner.  You have had a strong relationship with them since well before you considered buying a new home.  You feel confident they can get you a great loan.  Also, if you shop around, you are convinced that you can absolutely find a lender that will save you that extra .125% on your rate.

However, there is another factor for you to consider when choosing your lender.  You need to understand who has the greatest motivation to get your loan financed.  In truth, it is not your banker or financial planner or local mortgage broker.  It is really your builder.  Think about it.  If a third party makes a good faith effort to get you a loan and fails, they probably lose nothing.  You will probably not change your bank or financial planner if your mortgage does not pan out.  You may be told that there was an issue with the appraisal, or that the underwriters found some hair in your credit history.  These third parties are not incentivized to push for loans that may prove to be a bit difficult.  They will give you a warm smile, tell you they did all they could and then move on. 

That is not the case with the builder.  Remember, if the builder can’t finance your home, then they can’t close on your home.  Trust me.  There is no builder that will put a positive spin on a home that did not close due to financing issues.  You see, if the lender is in-house to the builder, the first thing the builder will do is discover salty sailor language that they did not know they possessed when having a discussion with their mortgage team to find out what is going wrong.  Then, after cooler heads prevail, they will work with the in-house lender to leave no stone unturned to figure out what needs to be done to close your loan.  Every day that a builder home does not close past the scheduled close date will cost the builder money.  They have to pay the carry cost on the home.  This is not an expense that your bank, financial planner or local mortgage broker will have to deal with.  And builders do not want to carry homes any longer than they have to.

So, next time you are feeling nervous about working through your builder for your mortgage, remember, you are both in the same boat.  Even if the builder needs to use some salty language to help navigate the sometimes choppy mortgage waters to help you get your loan.

Until next time…

Keep kicking the dirt!

Sunday, July 14, 2013

I am here. Where is my grocer?

I am here.  Where is my grocer?

So, it is time.  You have made that decision to buy a house.  However, the more established neighborhoods are too expensive.  Plus, you are looking for a home that will be big enough to handle your family’s growing needs.  Also, new schools and parks would be nice.  What can you do?  Voila!  You choose the brand new uber-community with parks, large affordable homes and new elementary school.  It is planned to have everything you need.  Except for one thing.  That 15 minute drive to the nearest retail area and supermarket is a real pain.  But, not to worry.  The developer said that it is coming.  You sigh in relief and wait, and wait, and wait.  You don’t understand.  Your community will have over 1,000 homes when it is finished.  There are other communities planned to go up around you and you see them moving dirt for that extension of the nearest highway as well.  With everything else happening around you, where is the retail.
I am sure you are all aware of the chicken and egg story.  Which comes first?  The chicken or the egg?  Well, in retail, there is no guess work involved.  Retail will definitely come.  However, it will not come before there are enough rooftops to support the planned retail.  If you assume 20 square feet of retail per household, a 1,000 unit community will generate a need for approximately 20,000 sf of retail.  Now, let’s assume that your average supermarket is about 45,000 sf.  In truth, they will average about 25,000 to over 60,000 sf.  Therefore, you need about 2,000 homes just to justify a supermarket.  That assumes there will be no other retail.  Beginning to get the idea?  Plus, I am going to go out on a limb and assume that you are not the only community in a 5 mile radius and that there may be other retail that may pull from your area.  Yes, it can get complicated. 

OK, so what can you do to try to determine when that shiny new store is coming just short drive away to your neighborhood?  Well, you can always call the corporate headquarters for your favorite grocer and ask their real estate department if they have any immediate plans to build a new store in your area.  Info straight from the horse’s mouth is usually better than BS coming out of orifices of others trying to sell you things.  (I am trying to be politically correct here, but fear I may be failing).  You can also check with the local municipality to see if there are any retail plans under approval.  Also, you can ask the municipality how many housing permits are being issued yearly in your area and what the current population of your area is.  From there, you can do the math to determine when your community and surrounding neighborhoods will generate enough need for your favorite grocer.

So, next time you are making that midnight run for that forgotten grocery list item, fear not.  You are just the egg and the retail is the chicken.  It will be there eventually.  Or are you the chicken?  I tend to mess this one up.

Until next time…

Keep kicking the dirt.

Monday, July 1, 2013

The Grass is Always Greener...

The Grass is Always Greener…

Here in the Sunshine State (Florida, for those in less desirable climates), or at least in most parts of the state, the common landscape practice for decades has been to install St. Augustine grass.  St. Augustine grass is a large blade, dense, but hard to walk on grass.  It has always been plentiful in sod farms and, with proper irrigation, it stays beautifully green all throughout the year.  As the weather is what attracts a large majority of the population to Florida, having a bright green lawn has always been a mandate for landscaping.

For years, the main alternative to St. Augustine has been Bahia grass.  The great benefit to Bahia is that you don’t really need to water it.  The stuff will never die.  This is a huge advantage over other grasses, where bugs, disease and heat will all contribute to the deterioration of a once healthy lawn.  However, Bahia has a somewhat stringy look to it and, horror of horrors, in the colder months or without sufficient irrigation, or both, it will be known to brown up.  You just can’t have brown grass in Florida yards.  For that reason, more than almost any other, you rarely see Bahia grass in homeowner yards.  You, will, though, see it in large swaths of common areas that are not high profile areas or are in areas that do not have irrigation.

Over the last decade or so, another grass has begun to grow in popularity.  Empire Zoysia.  It is interesting as I have mainly begun to see Zoysia in communities touting themselves to be “Green”, claiming Zoysia to be a more environmentally friendly and water tolerant grass.  The real beauty of Zoysia is just that, its beauty.  As opposed to the hard blade nature of St. Augustine, Zoysia is a softer grass that has a more carpet like appearance and is easier to walk on.  As an aside, I always find it interesting when people refer to Zoysia as an easier grass to walk on.  I have lived in Florida for almost 25 years.  I have never seen anyone throw off their shoes so they can go frolic in their grass – go figure.  Anyway, a second major benefit to Zoysia is its tolerance to certain pests and bugs, most notably cinch bugs.  Chinch bugs are nasty creatures.  You will not readily see them, but you will see their handiwork.  They typically thrive in the warmer summer months when yards, even when well irrigated, tend to dry out.  In these conditions, cinch bugs will eat your yard dry, leaving large patches of brown, dead areas in your yard.  Nasty stuff.  While Zoysia has its own pests to deal with, none are as insidious as the cinch bug.  No large dead patches of grass seemingly overnight.  Nuff said.

Regarding the environmental tolerance of Zoysia, you need to be careful.  It does require irrigation, just as St. Augustine does.  The difference is in how each grass absorbs the water.  St. Augustine has above ground stems.  Zoysia has below ground stems.  When St. Augustine stems dry out, the grass dies.  Since Zoysia stems are below ground, they don’t readily dry out, so the grass does not die so easily.

However, let’s not forget about that green, year round look.  St. Augustine, properly treated, will be green all year round.  Zoysia, if hit with a winter cold streak, will brown out.  So, during the winter months, when northerners are fleeing the cold, gray, cloudy north, they don’t want to get hit with brown lawns in Florida.

As a final note, a Zoysia lawn is more expensive than a St.  Augustine lawn.

So, what is the right answer?  The truth is, it is a preference.  St. Augustine is absolutely more prevalent.  However, a well maintained Zoysia lawn is definitely more eye catching.  Due to the preponderance of master planned communities in Florida, you do need to be careful as your association docs may restrict your ability to mix grass types together.  However, it is good to be able to have an eye to spot the difference and at least know why one yard may look different than the next.

So, remember.  While beauty may be in the eyes of the beholder, the grass may not always be greener on the other side.

Until next time…

Keep kicking the dirt.