As a general rule the largest purchase a person makes in life is a home. This essay refers to that type of real estate transfer. It's surprising to me people don't understand it.
I'll bet you think a buyer and a seller engage in a negotiation and arrive at a price that satisfies them both and a transaction takes place. Fair market value is established by the famous "meeting of the minds". Yeah. That's bull.
Usually, a buyer gets some understanding of what type of monthly payment they can qualify for with a mortgage lender. That gives them a price range to shop in. Being optimistic for the future and their future advancement they shop at the upper end of their qualifications. They spend at their limit or even what they know to be slightly above. Optimism and approval are the keys to putting them in the "sold" category. The housing bubble from 10 years ago proves that. The optimism thing is a constant. It was the lack of caution in the approval thing that created the problem.
As for the seller. The seller, by some means or other determines what they might get for the property they own. Probably the largest concern is not really connected to the current market or economic reality. That concern is; what they need to fulfill their goals. That means what amount after they pay their existing mortgage will let them progress. That usually means local or national relocation and the purchase of another home.
These circumstances are so common as to remain unsaid in the process. In four years I only ever saw one cash sale for residential property. That was pretty funny.
I shared an office with a guy named Joe Thomason. He was a funny guy. He'd worked as a casket painter interestingly enough. He was very dry witted. One day he had this older couple in the office. They were interested in a particular piece of property he had listed. So, he put them thru the qualification process. Job, income, assets. All of their answers were wrong. At the end of the process Joe said, "I'm sorry but you just don't qualify for the mortgage."
To which the husband said, "Well, we were going to pay cash. Would that be all right?"
While he pulled a sales contract out of the drawer Joe said, without missing a beat, " Well, we can do it that way." It was all I could do to keep from laughing out loud. I guess ya hadda be there.
My point is; the purchase of a home involves a mortgage nearly in every transaction. The buyer and the seller have their famous "meeting of the minds" and then the buyer applies for a mortgage. The mortgage company sends out an appraiser to determine if the proposed loan is a good risk and he places a value on the property. He uses a set formula to arrive at this figure. Comparable sales, tax assessment, condition of the property, recent appraisals. Anyone knowing that formula comes up with the same number.
Now here's a hook. Pittsburgh is an average market. 2.5 million people in the metropolitan area.. There are maybe three guys doing the appraisals for all the mortgage lenders in this or any comparable area. They employ the same methodology.
If the appraisal comes in low and won't support the required loan the seller has to come down in his asking price or the buyer has to come up with more cash. The only flexibility is on the part of the seller. The buyer isn't coming up, he's already spending at his limit. He can't and why the hell should he? There isn't going to be a second opinion.
So, this is the reality behind realty. A piece of property is worth what can be borrowed against it. When the people involved don't get that we get a housing bubble like 2007-8.
It would take too long and you aren't smart enough to explain derivative markets to you. You would think the lesson is: Don't lend money to people who can't pay it back. The real lesson is: Regulate, rigorously who these guys can lend money to and get them all off commission.
Good insight and advice.
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