Real Estate Advisor: March
20% Down: Gone but not forgotten?
Prior to the early 1980's, finding a residential mortgage
without enough resources for a 20 percent down payment was
next to impossible. In today's market, paying 20 percent of
the home's price up front is the exception rather than the
rule. A research study by the National Association of Realtors
reveals just how distinctly the status quo has changed.
How Buyers Pay for their Homes
In a national real estate profile, NAR surveyed thousands
of consumers who purchased a home from July 2005 through June
2006. The vast majority of home-buyers finance at least part
of their home purchase. According to the survey, 92 percent of
homebuyers in 2006 reported that they financed some portion of
the home's closing price. This does not represent much of a
departure from historical trends, as "all-cash" buyers
typically represent a small share of the real estate market.
 What is surprising is how much of the purchase
price the average home buyer financed in 2006. The average
home buyer financed 91 percent of the home's purchase price.
That means the average down payment overall was just 9%.
First Time Buyers vs. Repeat Buyers
The average repeat home buyer in 2006 financed 84 percent
of the home's price. Of all repeat buyers, 10 percent opted to
finance the entire cost of the home, with no money down. 62
percent of repeat buyers said they used proceeds from the sale
of a primary residence to pay for the down payment. 40 percent
cited the use of savings account funds.
On average, first time buyers financed an even larger
portion of the home's price tag - the average first time buyer
financed 98 percent of the home's purchase price (an average
down payment of 2%!). Four out of ten first time home buyers
chose to finance the entire amount of the home. 73 percent of
first time buyers reported that savings were a source of
funding for down payments.
Why Down Payments Are Shrinking
Why has the size of the average down payment (relative to
the overall closing price) dropped so precipitously,
especially among first time buyers? The easiest explanation is
the rising cost of home ownership. According to NAR's Housing
Affordability Index for November 2006, the Median price of an
existing single-family home was $217,200. In many regions
average home prices have risen at a rate far greater than that
of average income. In many cases the average homebuyer cannot
afford to pay for 20 percent of the typical home up front.
Over the last two decades the mortgage industry has begun
offering consumers a much wider variety of financing options,
in part to help home buyers bridge the affordability gap, but
also as a means of encouraging more consumers to become home
owners. Where once the only game in town were mortgages based
upon a 20 percent down payment, today's buyers can choose from
a range of 90 percent, 95 percent and 100 percent financing
options as alternatives. The prevalence of these
"minimal-down" or "no-down" mortgage products is a major
reason that large down payments are no longer as pivotal as
they once were.
Implications
In years past, buyers who chose low down payments or who
forwent the down payment entirely had less to worry about,
because consistent, rapid appreciation helped offset the risk
of financing the entire home's worth. As appreciation slows in
many markets, that often is no longer the case. Buyers who opt
for low-down or no-down payment structures can run the risk of
not building equity over the short term if the home's value
does not increase.
Buyer's Corner: The rent-back offer
Question: What exactly is a "Rent-Back" offer, and when
should they be used?
In most real estate transactions, the buyer takes
possession of the property at or shortly after closing. A
rent-back is an offer made by the prospective buyer to allow
the seller to remain in possession of the home for a longer
period of time.
Why rent-backs benefit the seller
Many sellers find themselves making the dreaded
double-move: first from the sold property into interim rental
housing, then from the rental into a newly purchased home.
Moving twice in a short time span can be costly, and not just
in a financial sense. Most sellers in this position would
welcome the chance to avoid any additional hassle, especially
after having gone through the sometimes-draining process of
putting their home on the market.
How a rent-back offer can benefit the prospective
buyer
 Because they are somewhat unconventional, making
a rent-back offer to the seller can give the buyer some
much-needed negotiating leverage. If moving into the home
right away is not critical for the buyer, a rent-back offer
may convince the seller to make concessions in return (by
lowering the price or altering contingencies in the contract,
for instance).
Rent-backs versus delayed closing
An alternative to offering a rent-back for sellers who are
not ready to move into their new home is to delay the closing
until the seller can move. However, it may be to the benefit
of both parties to close sooner rather than later. Beside the
peace of mind that a closed transaction gives both buyer and
seller, closing gives the seller financial flexibility that
may be crucial to them.
Buyers in competitive markets can use rent-back offers as a
way to set themselves apart from the crowds of other serious
buyers, and without getting into a bidding war.
Details and considerations
The amount of rent the seller pays the new owner in these
arrangements is negotiable. In most cases (and if the buyer is
not competing with other offers), the offer asks for the
seller to cover ownership costs (mortgage payment, property
taxes and homeowner's insurance). It's important to remember
that the monthly ownership costs for the new buyer will likely
be higher than they were for the previous owner, especially if
they had owned the home for some time.
If it works to the buyer's overall advantage, it's not
unusual for the seller to pay the new owner less than the
monthly ownership costs. In rare cases (usually in highly
competitive markets), buyers may offer a no-cost rent-back to
the seller for short periods.
Regardless of the financial arrangement, the length of
occupancy should be explicitly denoted in the closing
contract. Some areas have specific occupancy arrangement
contracts that should be filled out for this purpose as well.
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