The major theme of the two previous articles in this series is that the Home Equity Conversion Mortgage (HECM) has great potential value to senior homeowners planning their retirement. The value is realizable, however, only with the adjustable-rate HECM that provides multiple options for receiving payments.

Many borrowers are electing the fixed-rate HECM, which requires that they draw the full amount of their borrowing power in cash, leaving nothing for the future. In this and the next article, I will leave the realm of generalities and discuss the pros and cons of specific HECM uses.

Pay off a forward mortgage

Article continues below

Advertise with Inman

Part of the received financial wisdom of my generation was that your mortgage should be paid off by the time you retired. That way, no part of reduced retirement income had to be used to pay the mortgage. But too many are retiring today while still burdened with a mortgage, and some are paying it off with a reverse mortgage.

Related articles: Is lump sum HECM right loan for seniors? Maximize your borrowing power on a HECM loan

That uses a reverse mortgage to make the best of a bad situation. It replaces debt that must be repaid in monthly installments with debt that doesn’t have to be repaid until the borrower dies or moves out of the house permanently.

The downside is that the cost of the HECM, which includes mortgage insurance and other upfront fees, will usually exceed the cost of the forward mortgage. Further, the senior who must use all or most of the proceeds from a HECM to repay a forward mortgage loses the ability to draw spendable cash from the HECM in later years.

Purchase a house

Some seniors want to become homeowners for the first time — a “better late than never” decision. Others are homeowners now but want to sell their current home and purchase a different one, perhaps smaller or located closer to family.

These are lifestyle decisions that may be well-considered and sound, or they may be hasty and ill-conceived. I have seen both types, but the only general rule I know for avoiding bad decisions is not to act in haste, and consult those who play a role in the plan. It is a particularly bad idea to move in order to be closer to family without first discussing it with them. They could be planning a move of their own!

Given the senior’s decision to buy a house, using a HECM for that purpose beats the alternative of buying with a forward mortgage and paying it off later with a HECM. The advantage is that it requires only one set of settlement costs instead of two. But the downside is the same as that associated with using a HECM to pay off a forward mortgage: In both cases, the HECM is not available to ease the financial burdens of retirement.

Supplement income pending house sale

Seniors planning to sell their house in a few years who need additional funds in the meantime can use a HECM or a home equity line of credit (HELOC). While HELOC borrowers must pay interest on the amounts they draw, over a short period they can increase their draw by enough to cover the interest so that the net cash withdrawal is comparable to the draw on a HECM credit line or term annuity.

The advantage of the HELOC is that the upfront costs are lower — in some cases, zero — and the interest rate in most cases will be lower than the HECM rate plus the HECM mortgage insurance premium. This means that, assuming the borrower withdraws the same amount of cash on both, after any given period the HELOC debt will be lower than the HECM debt. That is the case for using a HELOC to meet short-term needs.

But the HELOC has significant disadvantages that in many cases will shift the balance of advantage to the HECM.

1. The HELOC borrower must qualify based mainly on income and credit, as with any forward mortgage. Many seniors won’t qualify for a HELOC.

2. If the senior changes her mind about selling the house and decides she wants to remain, she is in trouble if she took a HELOC because the HELOC must be paid off. The HECM doesn’t.

3. The borrower using a HELOC as a source of additional cash is dependent upon being able to draw against the unused portion of the credit line. But the lender can cancel the unused line at any time, and will if a question arises about the borrower’s credit, income or property value. This is not a risk with a HECM

From a seller’s point of view, contingent sale offers are risky. What if the buyers’ home doesn’t sell? Will the buyers list their home too high? Is their home in good condition and ready to go on the market? Many sellers would rather wait for their own home to sell to a noncontingent buyer than face the uncertainty of a contingent sale offer.

Buyers who can buy another home only if their current home is sold need to convince sellers that it’s worth the risk to accept their contingent sale offer. One strategy that can work in your favor is to list your home for sale before you present an offer on the home you want to buy.

This lets the sellers know you are serious about selling your home. Some buyers are tentative and won’t list their home until they have an accepted offer on the one they want to buy.

A lot of home sale transactions are put together with the help of the agents involved who communicate freely with one another. As a buyer who must first sell his current home, your listing agent can help to convince the sellers to accept your offer by arming the agent who’s representing you as a buyer with information that will help sell the deal.

Article continues below

Advertise with Inman

Ask your listing agent to prepare recent sales information of listings in your area similar to yours that sold recently to show that your list price is in line with current market conditions in your area. The sellers will want to know how long on average it’s taking homes like yours to sell. They also may want their listing agent to talk to your listing agent to confirm the information your agent provided.

Your chance of a timely sale will depend on buyer demand for homes like yours and on how many homes like yours are currently for sale in your area. In a low-inventory market where demand is high, your home may sell quickly. If there are a lot of listings in your neighborhood, you will need to be aggressive with your list price by pricing lower than your competition.

HOUSE HUNTING TIP: The sellers will want to know how long it will take for you to put your home on the multiple listing service. They are unlikely to wait a month or so for you to get your home ready for sale. As soon as you have made the decision to buy a new home and sell your current one, you should start preparing it for sale. This will make it possible for you to put your home on the market quickly.

If you find your dream home earlier than you thought you would and your home is not ready to market, enlist your agent’s aid in lining up a crew — handyman, painter, stager, etc. — to assist you with a fast prep-for-sale project. Ask friends and relatives to help with decluttering, donating what you no longer want, and packing up items to go to storage that you want to keep.

Before you make an offer, make sure you can provide the sellers with a letter from your loan agent or mortgage broker that indicates you are creditworthy and have the financial means to close the sale once your current home is sold.

Although it may seem silly, write a sincere letter to the sellers about how much you like or love their home and why you want to buy it. Sellers who have a pride of ownership and an emotional attachment to their home can be swayed in the right direction by a well-crafted letter.

THE CLOSING: Offer to pay the asking price, or more, if the market warrants it. Buyers usually pay a premium for a contingent sale offer.

More than 61 percent of respondents who purchased their home four years ago say they are as well or better off than they were four years ago, answering the quadrennial question asked every election season

Of the 94 percent of homeowners who still own the same home they bought four years ago, 10 percent said their home has increased in value, and 17 percent said their home value has stayed the same, according to an online survey of homeowners.

Sixty percent of homebuyers who were polled said they viewed their purchase as a long-term investment, and planned to live in the home for seven years or more. Twenty-five percent said they considered their home purchase as a medium-term investment and planned to sell the home within two to seven years.

A total of 915 homebuyers responded and participated in thsurvey. The states with the most respondents include California (nearly 30 percent), Massachusetts (10 percent), Texas (10 percent), Arizona (10 percent), and Florida (eight percent).

While most homeowners would rather not return to the disastrous housing bust of 2008, they aren’t very cheery about the future. According to Zillow’s second quarter Homeowner Confidence Survey, they are more pessimistic about the short-term future of home values in their local market than they have been in the past three quarters. One-third (33 percent) believe home values in their local housing market have not yet reached a bottom, while 38 percent believe they have already reached a bottom.

More than one-quarter (28 percent) of U.S. homeowners said home values in their local real estate market will decrease in the next six months, up from 20 percent in the first quarter. Additionally, less than one-third (30 percent) believe home values in their local market will increase, down from 42 percent in the first quarter.

Despite the increasing pessimism, a large number of homeowners anxiously await the opportunity to sell. Five percent of U.S. homeowners say they are very likely to put their home on the market in the next six months if they see signs of a real estate market turnaround. This translates into 3.8 million homes with the potential to come into the market. By comparison, 5.2 million existing homes were sold in all of 2009.

Looking backward, homeowners also became slightly more pessimistic about the performance of their own homes’ values in the past year. Less than a quarter (24 percent) of homeowners said their home had increased in value in the past year, compared to 27 percent in the first quarter. In reality, 34 percent of homes increased in value in the second quarter, according to the Zillow Q2 Real Estate Market Reports.

The vast majority of homebuyers like — even love — their agents; in the National Association of Realtors most recent survey of homebuyers and sellers, more than 96 percent of those who recently bought homes said they liked their agent, and 85 percent said they would work with that agent again.

But, as always, there are exceptions to this rule: buyer-agent combos that seem to be full of friction.

In those exceptional cases, a common complaint is that buyers feel their agent simply doesn’t understand or listen to them, as evidenced by the disconnect between their vision for their home and the homes the agent shows them. And no one likes to be misunderstood, especially when trying to get professional help making wise decisions about the financial, location and brick-and-mortar property characteristics that will shape many areas of one’s life for years to come.

Most often, in my experience, this is an issue of a disconnect between a buyer’s fantasy home and the reality of what their budget can buy on the market. The agent shows the buyer homes that the buyer sees as falling short of his location, size or stylistic standards, but in fact, the agent is showing the best homes that the buyer can actually afford. (This is otherwise known as having champagne wishes on a beer budget.)

Article continues below

Advertise with Inman

Other times, though, there is an even deeper communication issue: The buyer hasn’t been clear, or the agent truly hasn’t heard him out. To avoid this issue and make sure your agent is picking up what you’re putting down, in terms of your preferences for your home, here are a few tools for vividly communicating your vision to your real estate agent:

1. Digitally. If you want to communicate your style and aesthetic preferences to your agent, consider creating a digital notebook on the Web application Springpad. Here’s the thing: You can start keeping this notebook as soon as you start thinking about buying a home — you don’t have to wait until you have an agent to do it.

And you can use photos you snap on your phone while you’re out in the world, images from homes you see on design and magazine websites and even MLS listing pics, and you can annotate them with lists of features you do and don’t like about the homes or the images, links to the MLS listings, even voice memos or videos you shot yourself. And you can do this all privately, for as long as you want before you kick-start your house hunt, then share the notebook with your agent when you do get one on board.

A word of caution: If you truly want to use a digital notebook to communicate your vision with your agent, then fill it with reality-based images. Don’t just stick every fantasy home you see on the “Real Housewives” or “Million Dollar Listing” in there — use a separate board for that. On this board, keep to homes with discrete features, looks, etc., that you hope to find in the home you eventually buy and own.

2. Show your agent listings/homes that you like. Do this: As you’re ramping up for your house hunt, start online, looking at listings that you love; if you’re not the type to save images digitally, print out the listing and keep a file folder collection of them. Better yet, run your numbers (down payment, etc.) in an online mortgage calculator to get a very rough idea of your price range, then get out into the world and start attending open houses that come up for homes that are similar to what you hope to buy. Collect the fliers of the homes you visit and like, to show to your agent, once they are engaged.

And this doesn’t have to stop when you actually initiate your house hunt, in earnest. Don’t just sit back and wait for your agent to send you listings you like — though your agent should and, most likely, will. Be proactive: When you see listings you like online, send those over to your agent. When you’re out in the world and happen to come across homes for sale that seem like what you’re looking for, use one of the mobile apps, like Trulia, that will detect your geographic location and serve you up the listings of the nearby homes for sale. Then send them to your agent. (Frankly, sending your agent images and listings of homes that are not even for sale can be helpful at resolving communication roadblocks.)

Passively waiting to be shown homes you like is simply not an efficient way to get house hunting satisfaction, nor is it necessary for 21st-century homebuyers, given the unprecedented access you have to home listing information online.

3. Let your agent show you what she thinks you are saying you want, irrespective of price. This can be especially helpful for people relocating to a new area, or first-time buyers who are still trying to wrap their heads around what kind of home they can get at various price points. If you are concerned that your agent is not listening to your wants and needs, but she insists that she is, ask her to show you at least one house that she thinks reflects your vision as she understands it, irrespective of the price at which that home is listed.

I have done this myself, and have seen it done, maybe a dozen or so times, and let me tell you: It is the single most powerful way to go from feeling misunderstood to understanding the truth of the market, instantly. Nine times out of 10, the agent will show you precisely what you want, but it’ll be much more expensive than the budget that you’ve given her. While there’s always a little emotional letdown involved when you realize that the issue is your pocketbook and not your agent, it’s also empowering. It positions you to either up your budget, if that’s possible, or to be thoughtful and conscious about the compromises you will need to make to stay within it.

4. Write out your vision of home. I’ve long encouraged buyers to do a writing exercise at the very beginning of their house hunts, something I like to call the Vision of Home exercise. More accurately, though, what I’m proposing is that you set aside an hour and actually write down your vision of the life you want to live, once you are warmly ensconced in your home. It should cover everything from:

Family: Who will live with you in the home, throughout the time you plan to own it — any parents or extended family members? Any kids that you think will move out?

Work: Where will you work? And how much or little do you want to work? How will you get there? What does your commute look like? What does your income trajectory look like for the time you expect to be in the home? Do you have — or plan to have — any side jobs or businesses? Do you ever work at home, or want to?

Activities: What does everyone who will live in the home need to be able to do there? Are there any hobbies, work or other activities that require space at home, inside or out? Do you spend your weekends walking to the corner yoga studio and brunching, or do you spend it hitting up Lowe’s to prep for your DIY-home improvement handiwork?

Most of the time, buyers start communicating their vision with some sort of boilerplate house-hunting form, checking boxes for the numbers of beds and baths, etc., that they want. Starting with a free-form vision of home before you move to that level of detail will help you get clear on the big picture you’re trying to achieve with your home and, in turn, help you communicate the overarching goals and details of your house hunt in a clearer way to your agent.

If you’re comfortable with it, you might want to go so far as to let your agent review the results of this exercise, or cover the big picture it creates with her; this gives you the advantage of putting your agent’s experienced mind and networks to work to creatively spot properties that might work for you. If you don’t feel comfortable sharing your life vision, though, feel free to boil it down to a list you can share of your house-hunting wants, needs and deal-breakers.

5. Good, bad, ugly feedback sheet. Once you’re actively working with your agent and viewing properties, you might need to fine tune and course-correct your agent’s understanding of what you’re looking for.

One of my favorite tools for doing that is to simply give written feedback for each property, bucketing that into the good, bad and ugly (i.e., deal breaker-level disadvantages) of each home, as you see it. Then, at the end of every property tour, you can more readily remember what you liked and disliked about each property, even if you saw five or eight or more, and you can communicate those likes and dislikes in a way that empowers your agent to constantly uplevel the listings she shows you in terms of her alignment with your wants and needs.

Soaring capacity may be starting to slow the tide of rent increases that have spurred real estate investment and the greatest multifamily construction boom in seven years and record numbers of single family rentals.

The Multifamily Production Index (MPI), released by the National Association of Home Builders (NAHB) last week, improved for the eighth consecutive quarter with an index level of 54. It is the highest reading since the second quarter of 2005.  The MPI, which measures builder and developer sentiment about current conditions in the apartment and condominium market on a scale of 0 to 100, rose from 51 in the first quarter to 54 in the second quarter.

Millions of small real estate investors, encouraged by rising rents, have contributed to the nation’s rental capacity by buying distress sales and converting them to single family rentals.  The National Association of Realtors reports investors purchased some 1.23 million properties last year, more than a quarter of all homes that were sold in 2011.

“The strength of the MPI suggests that multifamily production is likely to increase somewhat going forward,” said NAHB Chief Economist David Crowe. “Multifamily production has already recovered substantially from a historic low of about 110,000 starts a year in 2009 and 2010 to the current annual rate of a little over 200,000. However, prior to the downturn multifamily starts remained about 300,000 per year for 12 consecutive years, so there is room for further improvement before apartment and condo production return to normal, sustainable levels.”

However, the latest data suggests that in some leasing markets the bloom may be off the boom in rising rents.

Nationally, rents rose 4.7 percent in August from a year ago, which, while still a gain, is down from the 5.8 percent annual increase in May – making it the slowest rise since March, according to Trulia.com. Some markets, however, are still hot, with rents up around 10 percent year over year. These include Houston and Seattle, Denver and San Francisco.

“Rents had been on fire earlier this year, but some of the hottest rental markets are starting to cool,” said Jed Kolko, Trulia’s chief economist, told Diana Olick of CNBC. “New construction that started last year is finally coming onto the market, giving renters more choices and some relief from rising rents. Still, rents are climbing in nearly all of the major rental markets.”