Monday, November 10, 2014

The Piano

I’ve always said that the world is perfect.  Unfortunately, for whatever reason, we then give it to human beings to run, and things get a little mucked up.

The following story is taken from the annals of my career.  Some things you just can’t make up.

My buyers were young and excited, this being the first home they were buying.  They loved the open feeling of this Leave-It-To-Beaver style house.  As you walked through the double front doors, you stood in front of a huge staircase that led to a lofted area off to the left overlooking the living room on the main level.  It was beautiful.
That loft was home to a magnificent shiny black 11-foot Steinway piano.  The seller was a concert pianist, and I remember that when we first previewed the home, I’d even commented on the fact that the structure of the building had to be solid.  That piano must have weighed a ton.

The evening before we closed, I met my buyers at the home for a final walk through the property.  Traditionally, we meet at the home to verify that the seller has moved out, the home is still in good condition, the appliances that were expected to be there in fact are still there.  All was well.  The only thing left was the piano, and the special moving company that was hired specifically to move just the piano was wrapping it up for the trip down that staircase.  The seller was excited about her move and was very happy to meet the buyers and answer any questions.

The buyers and I were standing on the curb discussing in detail what would happen the following day at the closing table when it happened.  I've been told that a tornado sounds like a freight train roaring by, and with that description, I know what a tornado sounds like.

You know what happened.  That piano got away from those movers, and it sounded just like that tornado.  We hit the deck, and lay flat on the ground 30 feet away.  When the dust cleared, the piano lay upside down on the front lawn.  Under it were both front doors.  We could see the living room and staircase through the 14-foot swath of the front of the home that was strewn all over the front yard.  The seller was running around screaming at the top of her lungs, hands wrapped around her head like she was trying to keep it from falling off her shoulders.

No one was hurt; that was good.  I told the seller that I’d call the other broker and have him over to the home as quickly as I could, and went back to my buyers on the street.

They were amazingly calm.  I invited them to sit in my car for a bit to discuss our situation.

“Obviously, something very bad just happened,” I said.  “The listing broker is on his way over now to be with the seller, and we’ll have to make arrangements for inspecting and repairing the home.  But you now have a choice, and I have to ask you a simple question.  If we have this home inspected tonight by a structural engineer and contractor, and together they can verify that everything is solid and can be repaired at the seller’s expense within a couple or three weeks, do you still want to own this home?”

They looked at each other for a moment, and she smiled.  He turned to me and said, “Honestly, we hated those front doors.  We were going to have them replaced anyway.  Do we get to choose the new doors?”

I couldn’t believe it.  “I think we can make that happen,” I said.  “I’ll have an engineer out here tonight to verify that the structural integrity of the home is solid.  We’ll have two bids from good reputable contractors by noon tomorrow, a time line for the work, and I’ll be sure the bids include an allowance for the doors so that you can pick them out.  We’ll be dealing with the seller and her agent, insurance companies, the escrow company, your lender and anyone else involved.  I’ll be sure that the seller is required to hold in escrow 1-1/2 times the higher of the two bids to pay for it all to protect your interests, and I’ll call you before 10am to update you.”

All was good.

The buyers were wonderful, and got exactly what they wanted.  The seller’s insurance company negotiated with the movers’ bonding company to pay the bill, the contractors’ bids were ready and the work completed in two weeks.  We closed the transaction the following day as planned with the money escrowed in place.
Like I said, human beings running the world doesn’t guarantee a smooth ride.  We all expect and plan for a wonderful transaction and easy process, but unexpected things sometimes just happen.  When they do, be sure you have a solid and experienced real estate broker on your side of the table.

One last bit of free advice.  Keep the piano on the main level.  Those guys are heavy.

Call me as you need.  I’m always here for you.

Enjoy the day,
303.541.1920 office
303.859.4467 mobile

Thursday, November 6, 2014

1% = 10%, or thereabouts

Anyone who wants to come in to visit with me about money or numbers can set a time anytime.  I love it.  I always encourage it, because clients can benefit greatly with some planning – if they know the numbers.

A few Rules of Thumb, though, will allow you to quickly understand those benefits without even running the calculations, because numbers move and change according to patterns. 

Here’s a good one that’s easy to remember:  1% = 10%, or in this marketplace, a little more than 10%.

The full out meaning is that for every one percent the mortgage interest rates increase, a buyer will lose about 10% of his buying ability, or the monthly payment will increase the same.

Let’s go to the numbers.  Assume that you can find a 30-year amortizing mortgage (after 30 years of making the same payment every month, your mortgage is entirely paid off) with an interest rate of 4.00%.  For every $100,000 you borrow, your monthly payment will be $477.42.  So what if the interest rate increases to 5.00%, or more?

Let's assume that you want that 30-year loan.  90% of my clients who borrow money for a home or investment have 30-year loans, by far the most common mortgage in America today.  

Here’s how it all happens:

Note that the monthly payment increases in a pattern.  Your payment at 5.00% increases about 12.5% over the payment at 4.00%.  Your payment at 6.00% is about 11.5% higher than the payment at 5.00%.  The 7.00% payment is about 11% higher than that at 6.00%.
Obviously, as the interest rate increases, so does the monthly payment.  The lower the interest rate, the higher the difference by just a little.  But it’s more than a 10% difference.  Not until you’re well above an 8% interest rate is it less than a 10% difference.  In this marketplace, you can count on 1% being equal to about 10%.
But what if you can’t or don’t want to pay that much?  You were fine with the $477.42 payment, but that’s it. 

Not a problem.  You just  borrow less money.

Follow the same chart, this time keeping the monthly payment the same as interest rates increase:

 Again, the monthly payment stayed the same, so the loan amount had to come down. 
Note that the loan amount from 4.00% to 5.00% went down about 12.5%.  The 6.00% amount came down about another 11.5%, and the 7.00% yet again, this time at about 11%.
Same numbers.  Same pattern.
The long and short of it is that the 1% = 10% rule (approximately) works very well at the current interest rates.  For every 1.00% the mortgage interest rates increase, you have a choice.  Either increase your monthly payment a bit more than 10%, or decrease the amount you borrow a bit more than 10%. 
Or something in between.  Borrow a little less, and pay monthly a little more.
Know that everything here was based on a $100,000 loan amount.  But try any other amount, and you find the same pattern.  It works for car loans, student and installment bank loans.  Anytime you borrow money for any reason, 1% = about 10%, maybe a bit more at the lower rates.
Numbers are fun.  Rules of Thumb are useful.  If you want to really dig into them, I’m available.
Call me anytime.  I’m always here for you.

Enjoy the day,
303.541.1920 office
303.859.4467 mobile