Real Estate - Stephen Smith

REAL ESTATE NEWS

Second Home Loans In The Outer Banks Real Estate Market

Second Home Loans In The Outer Banks Real Estate Market

I saw an article recently that caught my eye, actually the headline did. "Demand For Vacation Homes Is Down More Than 50% From Pre-Pandemic Levels" https://www.redfin.com/news/demand-down-second-homes-march-2023/ It made me wonder if people are avoiding short term rentals due to the wording, but that's not what the article is about. Mortgage rate locks for second homes are down 52% and this doesn't surprise me at all. As a real estate agent in a vacation area, I can see a real slowdown in activity. Some of that is due to a lack of inventory but the majority of it in my opinion is due to two factors that are symbiotic in nature. 1) When FHFA adjusted fees higher for second home loans in the spring of 2022, that alone put an obvious damper on borrowing activity. In my area this equates to a "hidden" 0.5%-1% difference in the rate offered on 2nd home vs primary home loans (assuming both homes are conforming/conventional loans that can be resold). CoreLogic did an article on this in September last year and you can clearly see the drop in demand. https://www.corelogic.com/intelligence/demand-for-second-homes-declines-in-2022-and-is-below-pre-pandemic-level/ 2) Couple that with the fastest Fed rate hikes measured in the last 35 years, starting in March of 2022. This caused mortgage rates to quickly rise, and buyers looking at a conforming loan were facing the double edged sword of the "hidden" rate hike plus higher rates than at any point since March of 2020. The average 30 year mortgage then quickly spiked from 3.22% in January 2022 all the way up to 6.95% in November of 2022. And this is the average 30-year mortgage tracked by the Fed- https://fred.stlouisfed.org/series/MORTGAGE30US This is not the average 2nd home mortgage, that would have shown an even BIGGER spike from January to November of last year. There was a small window of time when jumbo and portfolio loans were much lower rates, since they wouldn't be resold to Fannie or Freddie. But with the Fed continuing to hike rates, even those went up. Further damaging the carrying costs of a mortgage on a second home was the continued rise in home prices. In areas with limited supply (like a barrier island) and high demand, it has resulted in a higher $ per sq ft being paid in 2023 vs 2022 on the Outer Banks among completed sales. But buyers are opting for homes in the $300-500k range and aren't as interested in homes in the $800k range thanks to another change from federal housing authorities. When the conforming loan limit was raised to $726,200 for 2023, anyone buying an $800k house with 20% down would end up below the conforming loan limit. https://themortgagereports.com/27773/2017-conforming-mortgage-loan-limits-fannie-mae-freddie-mac So if homes cost more, and carrying costs for mortgages cost more, and buying a second home is penalized due to FHFA regulations, why wouldn't mortgage demand for vacation rentals drop significantly vs a time period when there was no "hidden" surcharge and the average 30-year fixed rate conforming 2nd home loan was around 4.25%? We haven't seen foreclosures like we did in 2007-2008 because homeowners today have plenty of equity after price gains of the last 2 years. Owners can do a cash-out refinance, list the house, rent the house out, they have tons of options compared to 2007-08. If a homeowner needs to sell, he can price the home to sell and there's no shortage of buyers. But there IS a shortage of buyers willing to pay current mortgage rates. I worry that homebuyers will start resorting to ARMs rather than fixed-rate mortgages to get some relief from today's mortgage rates, and I think the standard 30-year mortgage is very important for stability in the housing market. Further complicating matters is that the Federal Reserve has essentially put a cap on a soda and shaken it - injected energy into it that wasn't otherwise there - and when they remove the lid (and lower rates again) all of that excess energy will propel a tsunami of homebuyers back into the housing market, driving home prices up even more. I talk to plenty of people who say they are just waiting for rates to come down. And most current owners with locked-in 3% mortgages (before the "hidden" surcharge for second home ownership) have no real incentive to sell their house - so who will be listing their homes for sale? And if sellers aren't willing to give up their 3% mortgages, knowing they will never get a second home loan at 3% again, how much inventory can come back to the market? Real estate is still about basic supply and demand. The rapid rate hikes only injected external energy into the buyer demand equation. Buyers are lined up and waiting for rates to drop. But the FHFA/Fannie/Freddie second home changes will keep many owners locked into their homes long-term. And with lots of demand and very little supply, I think we all know what will happen when mortgage rates drop again. And I don't think it will benefit the people that the FHFA claims it has a "core mission" to serve - primary homeowners and first time buyers. They will suffer the most from rising home prices and competition from investors who suddenly see a 5% rate as a bargain. I think the FHFA and the Federal Reserve have set the stage for another "gold rush" in the housing market as soon as mortgage rates fall. Which according to the bond market, is likely to start as soon as fall of 2023.
Real Costs of Owning a Vacation Rental on the Outer Banks

Real Costs of Owning a Vacation Rental on the Outer Banks

It’s the dream, isn’t it? Owning a vacation rental on the Outer Banks can be a rewarding experience – access to secluded beaches, world class fishing, and allowing renters to help pay your mortgage every month as you accumulate equity. On the other hand if you buy the wrong house, it can be an endless stream of headaches and repairs. But what many buyers fail to account for are the expenses involved in purchasing their dream home here at the beach. These small details can make all the difference! Expenses Before Closing Congratulations – You’re Under Contract! You don’t just allocate money to a property at the closing table, you will start spending money as soon as you get a property under contract! Here in North Carolina we use the typical earnest money deposit found in many other states, but we also use something called a Due Diligence Fee. The due diligence fee is a fee you pay to the seller for the privilege of doing your due diligence on his property. You want to get a home inspection, your appraisal will need to be close to the purchase price, etc. So for the privilege of doing this (and the seller removing his home from the market while it’s under contract), you can pay the seller a “fee.” This due diligence fee is applied toward the purchase price if you move forward with the purchase, but you won’t get it back if you decide to walk away. The earnest money deposit would be returned to you if you decided to walk away but only if you terminate the contract during the due diligence period. The due diligence period is a timeframe during which you can do all of your inspections and research and decide if the house is right for you. If a closing is set for 60 days from the offer date, the due diligence period might last for 30-40 days. On an $800k home I might suggest that a buyer include a $4k due diligence fee and a $10k earnest money deposit. This is hypothetical but let’s just assume those numbers. We also want to get a home inspection, which for a home of that size might be $800-$1,000. Do you want a pool or septic inspection? Those might be another $200-500. Do you want a pest inspection? This could be another $250. So before you get to the closing table, that could be over $16,000 just for deposits and inspections. Another expense might be with your lender – you will have to pay for the appraisal of the home, and you may want to purchase discount points for a lower interest rate. You will typically pay an origination fee as well as an application fee. It’s adding up! Expenses At Closing What Are All of These Fees? Now we get to the closing disclosure form! If you haven’t seen one of these, here’s a sample of what this form could look like. It can be a little overwhelming to see the long list of expenses and things the seller pays for, things the buyer pays for, and some of the unexpected expenses. In our area closings are handled by attorneys, while in other states they might use title companies. As a general rule closing costs are typically 0.75% of the purchase price for buyers up to about $500k, 0.65% up to $750k and 0.5% or less once you get past that, but this number could be higher depending on the specifics. Are you buying a condo? You might have to pay for a condo questionnaire. This 0.75% number covers the items that attorneys will do to verify the title of the property, as well as attorney fees and miscellaneous other items (prorated taxes, insurance, escrow for HOAs, etc). You will also need to wire the remainder of your down payment to the attorney’s office at this time. So let’s take a break here and do some quick math – on our $800k beach house we have spent $20k during the pre-closing process (due diligence, earnest money, inspections and lender fees). Now that we are at the closing table, our due diligence fee and earnest money deposit are applied toward the balance. But on an $800k loan with 20% down, you will need to put down $160k. Subtract our earnest money and due diligence, and that means we now owe $146k. We got that $14k back! But wait, there’s the matter of closing costs. Once you add the title insurance, attorney fees, prorated taxes, escrow for insurance/HOAs/etc this number will likely end up around $20k. So we really owe $166k to the attorney’s office as our “cash to close.” Once you write that check or wire those funds, it’s on to the next step. Expenses After Closing Time To Pay Some Bills! You did it! Your dream of owning a vacation rental on the Outer Banks came true! Now it’s time to negotiate a Property Management Agreement (PMA) with a vacation rental company. This agreement authorizes the rental company to manage your home and rent it out for maximum revenue. But that service comes with a price – the rental commission. There are a wide variety of approaches to calculating this number, so I will just use one company’s structure as an example. Different companies will have different fee and commission structures, so keep that in mind. The commission rate will vary depending on how big your house is, whether it’s oceanfront, and several other variables. But let’s assume a 15% commission rate to start with. The rental company will advertise your house on their website and if you have a good year, you might get $80k in advertised rents. That’s not what you are charged commission on! The advertised rent includes various fees the renters might pay, such as linen fees, credit card processing fees, security deposit waivers, rental insurance, and other items that you as the owner don’t end up paying commission on. Once those fees as subtracted from the collected rent, you are left with what’s called the “owner rent.” This is the number you are charged commission on. So after renting your house for $80k, $65k is left over as “owner rent.” $65k minus 15% leaves you with $55,250. We aren’t done yet though! You as the owner will have to pay the bills on the property – electric, water, cable, propane, pool maintenance and then most of all the mortgage payment with insurance and taxes. Let’s assume $10,250/yr for those utilities and maintenance expenses, which leaves you with $45k. Can you make the mortgage payment on $640k of financed principal with that $45k/yr? It’s a razor thin line using today’s interest rates. And what about setting aside money for a maintenance fund? The HVAC might need repairs, you might need a new water heater, and can you handle these expenses when they pop up? I recommend that buyers keep a maintenance fund of 1% of the purchase price of a home per year, and let it build up over the course of time so that you are covered in case of an emergency situation. For this example property, 1% of $800k is $8,000 per year. So it would make that mortgage payment really tight. How To Get Back to Cash Flow Positive! Streaming TVs Can Save Lots of Money! As you have seen so far, the real costs of owning a vacation rental on the Outer Banks can add up quickly. But what can you do to turn a slightly negative cash flow into a positive one? The biggest thing you can do is put more money down. The less you finance, the less your monthly mortgage payment, and the easier it will be to cover all of your expenses with rental income. There are other ways to save money too – switch the rental home from leased cable or satellite equipment to streaming TVs – you could save $10/month per cable box, and in a house with 15 TVs, that’s $150/month you don’t have to spend. You could also try to change rental companies – you might get a lower commission rate at another company, or the other company might charge more per peak season week and rent your house for more money every year. Often times just a little tweak here and there can turn a home from a $10k/year hole in your wallet into an extra $10k/year in your bank account. I love helping investors find their slice of the beach here on the OBX, if you have any questions about our market feel free to drop me a line!
A Real Asset

A Real Asset

Just this past week in November of 2022, we have seen so many events that reinforce the value of owning a real asset. A popular crypto company, FTX, was found to be incapable of paying out its customers and filed for bankruptcy. Stock values have plummeted for several popular stocks like Upstart, Vacasa and Carvana. The Federal Reserve has ratcheted up rates all year long and slowed mortgage origination to a crawl nationwide. Wells Fargo’s loan origination pipeline was down close to 90% from 2021 levels. What’s an Investor To Do? In the face of such precipitous drops in value, investors typically run toward real assets. Gold and silver are a real asset. Real estate is a real asset. Whether it be vacant land, a second home, a vacation rental or even commercial real estate, it’s commonly viewed as a “safe escape” during times of economic uncertainty. Did you know that during 4 of the last 6 recessions home prices actually went up? Obviously 2008 stands as a major outlier and that was due to lax lending standards and a glut of foreclosures that rapidly depressed home values. Today’s lending standards are much higher and you can click this link to see how far foreclosures would have to rise to meet 2008-2010 levels. I want to show some examples of the damage done to 401ks and brokerage accounts over the course of 2022. If you think the 19.7% figure looks bad in the picture above, take a look at these. Upstart – down 80% YTD Vacasa – down 75% YTD Carvana – down 93.5% YTD These were very popular stocks during the Covid era, and it’s important to note how much wealth an individual would have lost by owning stocks like this. If you owned 10,000 shares of Carvana to start the year it was worth $1.847 million. Today those same 10,000 shares are worth $118,800. A loss of over $1.728 million. And it could be worse than that! Investors in FTX and other crypto companies may see their entire investment wiped out and reduced to $0. Meanwhile somewhere in this country is a homeowner who bought in a sought after vacation destination area like the Outer Banks, where we just set a record for highest median sales price last month. His home value may not be up much in 2022, maybe not at all, but it has not gone to $0. This is the value of investing in a real asset like real estate – no matter what happens in the stock market or the crypto market, you own that tangible real asset. How many folks request the paper copies of their stock shares? Not many. A Little Game of What If I realize it’s a tough market for buyers and sellers right now – no seller wants to sell their home with a 2.75% mortgage rate and have to buy another one with a 7.5% mortgage rate. No buyer wants to buy a home and pay that 7.5% mortgage rate, knowing that rates were less than half that just a year ago. But let’s break down the potential outcomes with our current mortgage rates as a buyer in today’s market. Let’s say you buy a real asset like a beach house today, and the following happens in January of 2023. Rates go up – You are happy that you locked in that 7.5%, because now it’s 8.5% and you would have lost buying power. Rates go down – You are happy that you have an opportunity to refinance and lower your monthly mortgage payment. Home prices go up – You are happy that you have gained equity in such a short period of time after buying a house. Home prices go down – You aren’t happy about it, but you plan to hold onto it for 5-10 years, rent it out and use rental income to pay that mortgage that you locked in. Now, will home prices go down nationally this year or next year? From July-September of this year home prices actually went up in 98% of US markets according to the National Association of Realtors. For the Outer Banks specifically, we have set several records for visitation and tourism over the last 2 years, and advanced bookings according to several industry sources I speak to are strong for 2023 as well. We also are a limited geographical area – most of Dare County is owned by the government and with the Cape Hatteras National Seashore occupying such a large percentage of beachfront acreage on the Outer Banks, there won’t be many new oceanfront homes popping up. Furthermore most of the buildable land has already been built on, and this puts an extra layer of pressure on inventory that large metro areas don’t experience. You can build out the suburbs and expand the metro area in places like Charlotte or Phoenix. The Outer Banks is just barrier islands and we don’t have that luxury. So if demand increases in an area with a limited number of homes for sale, that puts upward pressure on prices. Why Buying a Vacation Home Can Be a Good Investment Today Let’s start with the obvious economic problem of today, which is inflation. With inflation, everything costs more. We see it in rising gas prices, grocery prices, and even home prices. What will not change in an inflationary environment are fixed long-term costs such as your fixed-rate mortgage. If your monthly payment is $3,000/month today, it will be $3,000/month 20 years from now. Most articles claiming real estate is not an inflation hedge neglect to mention that the money coming in from rental revenue frees up your personal capital for other revenue streams. Buying a real asset like a vacation rental home at today’s prices can pay off substantially over a 10-year window. Here’s a quick example- You buy a vacation rental home for $1m in Nags Head today. The current jumbo rate at a local lender is 5.75%. You put 20% down ($200k) and finance $800k. The home brings in $120,000 in advertised rent, and $95,000 in owner rent (rent after the rental company’s fees are charged to guests). After all expenses on the home are paid including taxes, utilities, mortgage payments, etc you break even. Maybe you have an extra $5k/year to put into a maintenance/rainy day fund for home repairs and updates. Home prices here have risen substantially the last 2 years but let’s assume a safe number of 3% per year (3-5% are commonly used ranges for annual appreciation over long periods of time). If your rental revenue and expenses don’t change one bit, here’s where you stand after 10 years with the $1m beach house you bought in Nags Head. You owe $665k on your mortgage. Your home is now worth $1.344m. You didn’t have to pay a single mortgage payment out of your own pocket, because the home was cash flow neutral. You now have $679k of equity in this home. But this ignores several benefits – if “everything” costs more over time, that includes rental rates. Your accountant may be able to find some tax benefits. If mortgage rates were to drop at any point you could refinance and lower the monthly mortgage payment, improving cash flow. You may even have made some memories by taking family vacations here at your beach house during the occasional week it wasn’t booked. There’s nothing wrong with diversifying and certainly the stock market has performed very well for folks in the late 2010s-early 2020s. But the value of a real asset is that it has intrinsic value – it is incredibly unlikely (I don’t want to say impossible) for its value to ever drop to zero. Precious metals may not be at their all-time highs but they can certainly be liquidated for capital if the need ever arises. There will always be some intrinsic value, and the same can be said for real estate. The villain Lex Luthor from Superman had this to say- “You can print money, manufacture diamonds and people are a dime a dozen, but people will always need land.” It’s the one thing we aren’t making anymore. Lex Luthor – Superman Returns That’s a pretty harsh take but there’s some real truth in his closing sentence. They aren’t making anymore. Much like the value of silver and gold is driven by scarcity and supply:demand, the same can be said for real estate. And here on the Outer Banks we have limited land to build on, and supply:demand will always be more of a factor for us. So if you are looking for a solid investment in an era of economic uncertainty, that beach house in Nags Head might just be worth considering. If you would like to learn more about our market just message me anytime – I would love to help you achieve your real estate goals!

REVIEWS

We wanted to give a huge shout-out to Stephen Smith, our Buyer’s Agent while looking for a 2nd home in the Outer Banks, NC area. This guy did a fantastic job of working with us, helping us articulate what we wanted, as well as what we didn’t. His vast knowledge of the OBX area overall, as well as his extensive knowledge of the diverse neighborhoods in both the north and south ends of OBX was invaluable to us. He was always willing to check a property out, prepare a video, and provide detailed information on something we had an interest in pursuing. He provided objective observations about quality details, as well as things that needed work or might have hidden defects. Our house-hunting journey was lengthy (over a year!) and Steve stuck with us the entire time – we were happy to have gotten to know him and would recommend him to anyone looking for a new home.

krealeva
Stephen did an amazing job quickly finding properties for us to explore. We were on a short time schedule and he was on the spot the same day with some options. Also, we were purchasing from out of town, and he took care of all of the details to make sure all went smoothly right up to closing. He was dedicated and we appreciated that. Highly recommend Stephen for his exceptional expertise in Outer Banks real estate.

kpalasthy
Stephen was an excellent real estate agent and critical to our decision to purchase a home where and when we did. He took a very non-pressured approach with extensive local knowledge and relationships that made all aspects of purchasing a home easy. I would highly recommended him for anyone looking to purchase a home in the Outer Banks area.

markwmiller2
When looking for a Beach home on the Outer Banks (OBX) There are a lot of intricacies of the homes being from out of state and not used to buying a beach home for investment purposes having someone who has the following knowledge areas are important. 1) Neighborhoods 2) Revenue 3) Home problems and Construction Problems 4) Parts of a home that could become a disaster5) Connections- He connected me to amazing hot tub and pool people, Financing people that are local ( DO NOT UNDERESTIMATE THIS)6) Knowing the local Property Management Companies. He knows which companies are good for said neighborhood. It is imperative for your success to work with the right companies. He isn't biased or picks favorites. 7) He is a straight shooter. If you are looking for a investment beach home he will work tightly with you on the numbers and the facts that stand out with the property (IE a homes Anderson's windows costing up to $30,000 to replace. or leaks, Mold) 8) During the negotiation process his numbers were in line and on point.I think the facts above speak for his dedication. He is no pressure, it took me a year to buy however I am kicking myself for not buying a year prior when he told me.

aghakoondari
Stephen was very honest and straightforward. He was a true advocate for our best interests. Our house sold for a fair price in a relatively short period of time. I would highly recommend him.

tmurray bridgewater
If there were a million stars to give Stephen, I would! It was divine intervention I came across a review similar to this one raving about how after many years of searching with multiple other realtors, Stephen delivered and the buyers finally had thier dream home. I too had searched for many years (8 in fact) with multiple other realtors and found myself with nothing more than feelings of frustration and exhaustion.I sent Stephen a message through his website and after chatting with him on the phone that afternoon I immediately fealt like “this guy gets it”. I fealt excited a hopeful again. Little did I know, Stephen would have me under contract in just TWO WEEKS from that day.I was in California for the entire closing process and didn’t even come back to step foot in the house until the day I closed. That was a considerable leap of faith on my part but with Stephen at the helm it just felt right. I could go on and on about his wealth of knowledge, all his great referrals, his Johnny on the spot attitude and just being an all-around great guy but all of that and more could just never do Stephen justice. The best I can say is call him now! You won’t regret it.I love my house and I couldn’t be happier.

user51195833
Stephen was an amazing guide and partner in our hunt for a second home in the Outer Banks. Candidly, I am not the easiest of clients. Stephen always made me feel important and never failed to do everything in his power to obtain the information and data I desired. Early in the process, I had shiny object syndrome, running analysis and requesting information on practically every new listing from the 4x4 area in Corolla to Hatteras Village. Stephen always responded to my requests for information. Just as important, Stephen routinely provided invaluable experienced backed opinions and advice and was never pushy. After several months of educating and analyzing, we finally closed on a great second home. Without Stephen, there is no way we would have made it across the finish line.

user2006883
We were very impressed with Stephen during our house search and purchase. He stuck with us and was very supportive despite losing out on a few properties early on in our search.He kept us fully informed during the due diligence and closing process. We did the search and purchase from another country and Stephen made himself available at different times of day and conducted virtual tours for the properties we wanted to view.Thank you Stephen we very much appreciate you and our experience working with you!

joshuafbc01
Buying a home can be a stressful event but working with Stephen Smith was super easy and he kept us up to date with everything going on. Our family would highly recommend Stephen to our friends and family especially if you are buying in the OBX.

heathwlee