How buyers pay for their home purchases in River Oaks is always interesting to watch, since it is an indicator of trends in the neighborhood. This time we have dug deeper than usual to shed some light on the details. And what’s clear is that there are more ways of paying for property today than ever before.
Take a look at the pie chart below. For 2017 we broadly broke down the methods of financing into five categories. (If you really want to wade into the weeds for more details, give us a call at 713-240-2611.)
Typically, in recent years we have seen 65 percent of transactions in River Oaks being financed by mortgage loans. This may dip slightly in years when speculative builders are especially active in the market. That’s because there are fewer houses for end-users to buy and more construction loans involved.
In 2017 conventional financing accounted for less than half of transactions. In terms of dollar value, mortgages added up to just 36 percent of financing. While loans were easily accessible for qualified buyers (despite the onerous paperwork requirements and delays), there was more variety in the ways to pay in 2017. These included special loans from the private banking departments of financial institutions with which the buyer has a relationship. These special loans allow an escape from the hassles of Big Mortgage.
Well, cash certainly makes things easier for both buyer and seller, largely because the paperwork, underwriting uncertainty and delays are avoided. In recent years about 35 percent of transactions in River Oaks were paid for in cash. That share jumped to more than 40 percent of actual dollar value in 2017. Those sales were at every level of the market, from a little teardown on the edge of the neighborhood to estates in the premium sections.
A point of note regarding cash purchases at the top end of the market, is that often they are just a prelude to spending serious additional money on remodeling and expansion, much of which is subsequently financed.
Construction financing may initially just include the loan for a lot purchase with the actual construction loan terms to be finalized when plans are ready. So, the number shown here, 11 percent of transactions, is accurate, but the final dollar amount borrowed will rise significantly as a proportion of overall financing in the River Oaks market before these projects are completed.
The old rule for construction financing is that land cost should not exceed one-third of final sales price of speculative new construction. We are currently seeing that rule being gradually bent, either by a pitch to the lender of constrained construction costs (not what a buyer wants to hear) or by optimistic sales price projections. Either way, there will be tears.
Trust Fund Notes
Once an exotic method of finance, notes from family trusts have become a significant factor in River Oaks in 2017, accounting for 10 percent of the market both in dollar terms and number of sales.
It’s a perfect solution for younger buyers in this market who may not have a deep enough credit record for conventional financing. It is also attractive to a buyer who wants to make a quick and clean purchase, free of jumping through hoops for underwriters.
The notes from family trusts are often refinanced at a later date by a loan from conventional lenders.
There was only one case of owner financing in 2017, a phenomenon not seen for years in River Oaks. It almost makes one nostalgic for the late-1980s.
Consult your tax attorney or certified public accountant for the implications of the recent tax reform for your current and future real estate purchases.