Todd Galde
So in reference to, I need to clarify or focus on the fact that we're talking about residential real estate, just for people that that chime in not knowing the the actual product that we're talking about- Buying before selling is essentially purchasing the next home before having to sell the existing home. So this message, if you will, applies to existing homeowners and primarily people who have been in their home for many, many years and have the ability of being able to purchase their next house. So this is in reference to people that are wanting to make the transition, want to move and the ability to do it before having to sell the departing residence. The buying before selling messages out there, if you can actually Google it and there's dozens of companies that that promote this, but the version that we're talking about is truly purchasing the next property before even listing the departing residence. There's tremendous benefits, which I'm sure we'll get to today, of being able to do that. So buying before selling, from my perspective and the services that we bring, is exactly what it sounds like, but it's literally purchasing the next property, the next home, before having to sell. Richard Wexler That's really interesting. I've not really heard of that. Obviously, I've heard of people that can do that. I mean, I have a neighbor right across the street with a for sale sign in their yard and the last time I talked to him, the conversation was they had to sell that home before they were able to purchase another home. So as you say, this may be something that's fairly common in the business, but I was not really aware that this took place a lot. What are the traditional ways? You know, we talk, well let me back up. We talk about retirement, and we talk about this little tiny word called "care" that a lot of people like me can't spell, don't really understand. So what are the traditional ways that homeowners will downsize, or if they have to, buy in to retirement communities? Todd Galde I've heard from agents that I work with that statistically 80% of existing homeowners think they have to do this transaction, or consummate this transaction, the traditional way, which is what you're which is what you alluded. The traditional way is is selling first, right? So it means obtaining the funds for the new purchase, or the buy in, after officially selling the departing residents. Let's say you have a home that's worth, let's just use $1,000,000 as a round figure, and you still owe $100,000. So the mortgage for example is $100,000, and that would mean there is $900,000 of equity in this home. Over 80% of existing homeowners think that the only way to get those funds for their next purchase or their next transaction is to sell the property first, right? Relinquish control of it, and then they obtain those funds and then they can purchase the next house. So that's the traditional way of doing it, and the way that most people think they have to do. Richard Wexler Really interesting. Again, this is a concept that I really haven't thought about that much. I'm not sure if the listeners out there have as well. You know why is buying before selling so unique, or rather what makes it challenging. Todd Galde So this goes back to the second question, which is why do people think they have to do it the traditional way? And the reason is because in 2014, January 10th of 2014 to be exact, the government rolled out an 804 page document, a set of rules that lenders have to abide by in order to transact primary residence transactions (Owner occupied, the home that you live in) and these rules require a certain qualifying of the borrower and the ability to repay, what we call ATR rules. Prior to this date, if you remember the the crash of 2008/2009, when people were, you know, literally able to breathe on a mirror and get a loan without income verification, no down payment, the rules were just so lax. And of course, that led to a worldwide collapse financially. So they spent several years creating these rules and then they rolled it out 10 years ago, in 2014. The primary focus of these rules were for primary residents, owner occupied transactions and that you as a lender have to prove that the borrower has the ability to repay the mortgage. So what does that mean? ATR is the acronym that we use, it basically means that if I have a loan that has a $3500 a month payment, I have to prove that the borrower has $7000 a month of income or $7500 a month of income in order for them to quote UN quote qualify for the payment. OK, now let's fast forward to your question, right? Why is buying before selling so unique? If I were going back to the scenario that I shared where I own $1,000,000 property, I have a $100,000 loan and I used to be gainfully employed with a large tech firm making a good, strong salary, but five, six, seven years ago, my wife and I decided to retire...And so, you know, we retired, right, and now we live modestly on Social Security, some pension, and then I've got a 401K or a retirement account. Now, I have $900,000 of equity. I'm sitting pretty. I've got great credit and I've I've even got, let's say, a million in the bank, right in a retirement account. I walk into the bank and tell the loan officer, hey, my wife and I want to move. We want to downsize, to be closer to the grandkids. We live in Sacramento, or wherever that is, and we we want to downsize and move closer to the grandkids. A smaller home only priced in the $400,000 range. We have tons of equity in our home and I would like a mortgage in order to buy that home for $400,000. The first question the loan officer is going to say is OK, let's sit down. How does your income look? And they're going to say, well, we don't have much income, you know, $1500 a month in Social Security, maybe another $750 in pension. And so they try to qualify. $400,000 mortgage to purchase this new house. And they don't qualify for the mortgage. So then they go to the next bank, and then the next bank, and these rules apply to all owner occupied residential financing. So ultimately what ends up happening is they, and this is the reason going back to question #2, this is the reason why people then then have to say, OK well we just have to sell first, which is the traditional way to make this, work because we've been turned down by the bank. That cycle if you will, is very common with people that are retirement age who have a lot of equity who think "you know, I've got great equity and credit. I'm the perfect candidate for a loan. And yet you won't give me one because my income isn't high enough. But I have $1,000,000 in the bank and I can draw from that..." these these rules that came out in 2014 don't allow for a unique pulling from these funds. We have to have verified, showing a month-to-month static income to prove the ability to repay. So what makes our solution of "Buying Before Selling" so unique, is we don't require that qualifying and I'll get into some of the details of that in just a little bit. But that's what makes this so unique. That's what makes my "buying before selling solution" is that you don't have to qualify for a $400,000 loan when you've got the equity. Our solution is driven by the equity. One last comment to kind of close the gap, close the circle here, people might say "well, hang on, but don't you have to follow the same rules? (Because we're dealing with an owner occupied primary residence transaction.) Don't you have to prove that they have the ability to repay or the ATR?" I say yes, the sale of the departing residents is the ATR and that is allowable based on these rules. So as long as you have another property that you're going to and then the funds from the departing residents are going to use to basically consummate that transaction, that qualifies as the ability to repay the the sale of the departing residence. Richard Wexler This is extremely interesting. Like I've said a couple times now, I really hadn't heard about this. I would have thought that most homeowners, especially as they age and have retired, are looking at that exact situation where bank 1, 2, 3, 4, 5, 6 keeps on turning them down. I was certainly not aware of a scenario like this. So what are the benefits of buying before selling? Todd Galde In order to discuss the benefits of doing it this way, I first want to talk about the the pain of not doing it this way. The traditional model, that we talked about in second question where I sell first, there's tremendous pitfalls and frustrations, and this is actually why a lot of people just don't do it- because it's so frustrating. If you can imagine, and it depends on the area on where you're buying. If you own a home that's worth $1,000,000, and you owe $100,000, so you've got lots of equity, and you see a home that's worth $400,000 that you love, right? This is generally what drives people's interest in this is, oh, we want to be closer to the grandkids. So that's that's the first, you know, "why". Why am I wanting to make this move? We want to move, the goal of this whole transaction is not selling. The goal is moving. And so why? Why do I want to move? Well, I want to, my wife and I want to, my wife isn't doing well physically and or I'm not doing well physically so we want to move to a retirement community. Or little Johnny is learning to play baseball, and he's in T-ball and I don't want to miss this time. This is our next chapter in life, is being with the grandkids and so my "why" is to be close to the grandkids. So you have a desire, and you start searching and it's always with the family, right? You know, "Hey Pops, You know, now that you're excited about moving closer, we found some good properties that we think you might like. You know, ones listed for 425k or 435k, take a look." And so they start going online they start looking and they get excited and they start seeing properties that they really like. Now, one pops up that they that they say, OK, this is great and we want to make an offer on that property. If it's in an area that allows for, if it's in a slow market, if you will, you could probably get away with submitting what we call a "contingent offer". And if you've either bought or sold a home, you know that when I submit an offer on a property and I don't have the cash to pay for it, and that the cash is going to come from my home, I'm going to have to submit what's called a contingent offer, so I will close on the purchase after I sell my departing residence. In you know, in some areas that's OK, right? Because they didn't expect a quick close anyways and so they're they might allow for a contingent sale. In most areas of the country, because real estate is still very in high demand, the sellers are going to say "no, we won't accept the contingent offer. We want you to close now, as soon as possible." And so now you've dealt with. Oh, shoot. OK, honey, we got to sell our house first. But then you have to live somewhere in between. And then where do you move all your stuff? When you start thinking about the hurdles of selling first, and then buying- and we don't have enough time to go through all of the pain- it becomes it becomes so onerous that people just shut the laptop and they don't think about it. The benefits of buying before selling is allowing for the homeowner with lots of equity, to offer on the property that they really like, without any contingency on the sale of their home. They can close quickly so we can close within two weeks. We don't require any appraisals. So there's you know there's that reduces the cost and certainly reduces the time. And again, there's no qualifying, per say, on the income - it's driven primarily on the equity in the homes. The primary benefit of buying before selling is you get the dream home, and the secondary equally as important benefit is that after you've purchased the home, and you've moved all your stuff to the new home, your agent gets to list your departing residence, the home you own right now- vacant and properly staged. Statistically, the National Association of Realtors says that the the sale of a departing residence that is vacant and properly staged will sell 18% faster and, in most cases, achieve a higher resale value. So you're going to make more money and it's going to sell faster when you're not in it. Those are the benefits of buying before selling it. Richard Wexler Yeah, I'm hearing a lot of benefits. So are there downsides or risks that people should be aware of about buying before selling? Todd Galde The immediate downside is the cost. Traditionally you only have this loan for maybe two months, six weeks, 10 weeks. So however long it takes you to sell your old house, we have to charge an origination fee. In order for us to make money, quite frankly. The cost of that, while it will vary, is generally in the 2% range. 2% of the actual loan that the borrowed amount, and that's our model. Other models and other buying before selling solutions have different costs. Our model on average is about 2%. So that means you're going to spend about $8,000 to purchase a $400,000 home before you have to sell. In some cases, you know people think, well, I don't want to spend $8,000. Honey, let's try to sell first, right? So that's the first downside, is the cost. Also related to the cost is if it takes too long, there's an interest rate associated with it- what we call the bridge loan, this buy before sell loan. The rate is higher than than traditional rates, and may vary between 9-11%. But you only have, like I said, you only have this loan for a couple months, right? The other downside is what happens if it takes more than two, three, four months or five months, to sell your old house. Our loan is 12 months long, so we're not going to cut you off after four months, but you do incur a cost. So there's a carrying cost if it goes too far. So those are truly the only downsides to buying before selling, is really just the cost. Now, one last comment with regards to that downside though, now what I share with people is, as I mentioned in the benefit, when you sell a vacant and properly staged home, it's going to sell faster and for more money statistically, and this is in nearly every transaction that we've done, the resale value of the departing residents is higher than the actual cost of buying before selling. So they end up making more money, which covers the cost, and everybody wins. Richard Wexler Folks, this is a lot of great information that Todd's giving you. Obviously, I would recommend having a thorough conversation with your spouse, with your partner, with your kid. Whomever you talk to within your family, if you work outside with the financial advisor or planner, speaking with them as well. Todd, can you explain the financial structure of buying before selling? Todd Galde You bet. This is a great question. We use a financial structure called "cross collateralization" and what that is, even though indicate in the scenario that I've been using where the property is worth $1,000,000, they only owe $100,000 and the new property is $400,000. There's plenty of equity in the departing residence to just take the $400,000 out and then pay cash, but legally we have to cross the actual new transaction. We have to tie it together in order for the ATR rules to be to be adhered to and so that's called cross collateralization. In many cases, we can structurally put $400,000 against the departing residents, but there's still a lien on the on the new transaction, in some cases where there's not enough equity to just get it from the departing residence, then we will actually divide the loan into two liens- Let's say there was $200,000 against the departing residents and $200,000 against the new one, there's your $400,000 that ultimately allows for the purchase of the new property. So that's the way it's structurally we can adhere to the ATR's ability to repay rules. Richard Wexler Well, this is again, it's been a a very interesting 20 some odd minutes, folks, you've gotten a lot of information. Todd, I know you work in California, do you also work in any other states outside of California? Todd Galde Yeah, great question. So legally you have to be licensed in the state that you do the transaction. I personally am licensed in California, Florida and Idaho. The investors that I work with are also licensed in another 10 states, including Colorado, Arizona, Oregon and Washington etcetera. So we can't necessarily do this in every state, but in most of the states that people are moving to and from, we're able to do this. I would say, even if someone that is listening to this and they live in a state that I may not have referenced, it's still worth a telephone call to see if there's another way to structure the transaction because there are other ways to obtain the financing of buying before selling without having to use the private equity solution that that I've been talking about. So I always encourage people give me a call, we can spend 5 minutes on the phone and then at least you'll know what your options are. Richard Wexler Fantastic information. Along those lines, if people do want to reach out, what do you want to give out? A phone number? e-mail, website? What would you like to tell them? Todd Galde Yeah, you know, I don't mind my phone number, which is 925-381-8190 people can also go to www.buybeforesell.com. And all of my contact info is there as well. Richard Wexler That's fantastic. So folks, I mean, this has been a great subject. Please share this with friends and neighbors as well. If you want to get in contact with me, have a comment, a question, or would like to be a guest on the podcast. My e-mail once again [email protected]. So I want to thank Todd. This has been been some fantastic information. So again, thank you Todd. And folks that, as I always say, until we talk again have yourself an awesome day.
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