Month: July 2021

100% Financing Mortgages: What’s the deal?

100% financing is buying a home with zero down payment.

No savings are required. The bank completely finances the purchase of your new home. All you have to worry about is your monthly mortgage payments. Sounds great, doesn’t it?

These loans have the potential to allow buyers to secure a property that other banks would not consider offering them a loan on. And in Cayman’s current real estate market, it is sometimes the only way people can get on the property ladder.

But is it too good to be true? What’s the catch?

Unfortunately, there is a darker side to these enticing mortgages, which many overlook.

Added Expense

Zero down mortgages are wildly more expensive than a traditional loan. This is because the rate at which the bank will charge you interest is much higher. So what you end up paying the bank in total interest (the amount of money paid on top of the purchase price over the term of the loan) is much greater. 

Below is a side by side comparison of 100% financing and a standard loan. This example is based on recent rates to finance an Isabela Estates land lot, listed at CI$31,700 in the Cayman Brac.

Property Cayman Financing Comparison Mortgages Cayman
Isabela Estates Land Lot #16. MLS 412717.
Full properties details: http://www.propertycayman.com/buy/land/isabela-estates-cayman-brac-lot-16/

The bank is assuming greater risk when offering 100% financing. As a result, they charge a higher interest rate to ensure they make their money back. So while you don’t have to provide funds upfront, you ultimately pay more for the property.

The interest rate and the total interest over the loan term are just two factors you need to consider when comparing financing options. For general information on mortgages, I encourage you to read my previous blog: Mortgages in Cayman.

Added Time and Stress

In my experience, the institutions offering 100% financing mortgages end up delaying property sales. The length of time between when your Offer is accepted to the Closing day will be considerably longer and often more stressful – for all parties involved.

If it is not a local Class A Bank in the Cayman Islands, even “pre-approvals” do not always guarantee you a loan.  Your loan application must cross multiple desks, and in some cases, go off-island before they can confirm your loan.

Unattractive Offers to Sellers

Sellers will be comparing your Offer to Purchase to others. Of course, price tends to be the most significant deciding factor, but the number of conditions, the timeline to Close, and the type of financing can influence whether a seller accepts an offer.

The time and stress that accompany 100% financing mortgage loans could deter sellers from accepting your Offer. In short, the financial institution you select can put you at a disadvantage.

As a buyer, this can feel discriminatory. Why should the seller care where you are getting your funds from? Put yourself in the Seller’s shoes. If they can finalize the sale of their property within two months versus four months and avoid unexpected issues, delays, and worries, then of course, they are going to proceed with the most uncomplicated Offer.  They have to mark their property off the market while you work through your conditions – time that can be wasted if your mortgage is not approved.

Deposit Still Required

A deposit, or what some may call earnest money, is how buyers show sellers they are not just wasting time. It is like a security deposit on the sale itself – if the sale goes through, you get your money back if you’re approved for 100% financing.  However, you still need to have the funds in your account, ready to put down when you make your Offer to the seller.  These funds are then held in escrow (a special holding account) until the property transaction is complete. Unfortunately, it is not uncommon, especially for first-time buyers, enticed by 100% financing from the bank, to overlook needing funds for the deposit.

Failure to Close on a Property

In my experience, lender guidelines and requirements for 100% financing are constantly changing. And as the Buyer, you have signed a legal contract with the Seller, making it highly stressful and risky when delays occur and the processing is out of your control. Whatsmore, even though an offer is accepted, the Seller can still walk away from the deal if the conditions and deadlines are unmet. In short, you risk losing your deposit and the property if your selected financial institution does not deliver as promised.

Increase Risk of Defaulting

Many new home buyers wonder why most loans require a down payment. Why can’t the bank finance 100% of the home’s purchase price? Why is a deposit needed? It all comes down to risk. Lenders want to know that they will not only be paid back but will make money by investing in your property purchase.

Numerous studies have shown that the higher the down payment on a property, the lower the likelihood of the borrower defaulting on the loan. Without putting any money down, 100% financing can entice people to purchase properties beyond their means. As a result, they find themselves overextended each month, struggling to make their mortgage payment. So much so that the down payment amount is becoming the single most important factor when the bank determines risk especially with no Credit Score system established in the Cayman Islands.  It demonstrates the Buyer’s ability to save, giving the bank confidence in their ability to pay back the loan. That is why, years ago, the standard down payment amount in the US became 20%. Anything less than that requires insurance, so the lender would get their money back if the borrower failed to pay back the loan.

In short, a higher down payment gives the lender more comfort. But it also usually means a lower interest rate for you and fewer years for the interest to be amortized, saving you money in the long term.

Widening the Affordability Gap

100% financing mortgages are aimed at helping people get on the property ladder. But in actuality, they can end up perpetuating sellers’ markets. By inflating both the number of potential buyers and their budget, no money down loans continue to drive up property pricing.

~

The Take-home Message

Buying a property, whether it be your first or not, is a process that can be overwhelming at times. A mortgage is a long-term commitment, and the fine print is extremely daunting even for the savviest of real estate investors. So please do not be embarrassed to ask questions. Do your homework. Compare banks, interest rates, and how they process loans.

Before signing any loan document, ask yourself these questions:

  • If you lose your job, could you still afford the mortgage payments?
  • Property values go up and down. In a down market, because of the interest owed, your mortgage balance will likely be higher than the home’s value. This means you may not even break even if you had to sell urgently. Are you willing to take this risk?
  • There are selling costs. If the value of the property is down, these costs will come out of pocket. Will you have the funds to cover the these costs in a down market?
  • Are there costs to terminating your mortgage early? Read the loan contract fine-print.
  • Have you really consider the costs of owning a home? Your monthly mortgage payment is just the beginning. Then, there are utility bills and regular maintenance. And trust me, you need to expect unexpected repairs.  

To get a rough estimate of how much you could afford, and what your monthly mortgage payments would be, check out our mortgage calculator.

100% financing can be a blessing or a financial risk. Educate yourself on all your lending options ahead of considering properties. Not only will understanding how much home you can afford help narrow your property search,  but it will also put you in the best position when you do find the right home for you.

Purchasing a property is one of the most significant financial decisions you will make in your life. So let’s chat candidly about the numbers and what they really mean for you.

Cayman Real Estate Market: The 2021 Midterm Report

Cayman real estate midyear review _ Michael Joseph_ Property Cayman

We get it. Not everyone finds real estate stats as fascinating as us.

So instead of boring you with numbers, inundating you with percentages and averages, we are delivering just the key takeaways. Digestible nuggets of information, apprising you of the Cayman real estate market performance and giving you insight into what is to come.

So without further ado, I give you big picture Cayman real estate.

Decline in Available Listings

The trend continues. For over a year, we have consistently seen a decline in the number of available listings. This past quarter, there was an increase in new listings compared to Q2 2020, which is not surprising considering we were in lockdown last year. However, despite an uptick in new listings, persistent high demand keeps depleting the new supply, so much so that the number of available listings continues to drop. We have charted a 14-month consistent decline, hitting new records lows. Further evidence of this is the ongoing decline across all real estate sectors in the number of days on the market, the time between for sale and sold. In short, the market is ‘undersaturated’. Supply can not keep up with demand, as homes are selling faster than new properties are listed.

Decrease in Back on Markets

Last quarter we saw a continued softening of back on market listings. Meaning there are fewer failed contracts or listing renewals. Deals are closing on time, and listings aren’t sticking around – a powerful indicator of a confident market.  This is also validated by the ongoing decline in the average number of days on market for listings.

Increase in Offers

Every quarter for the last year, the number of new offers have consistently surpassed the previous quarters. That means the total number of offers to purchase submitted continues to rise, despite upward pressure on pricing and border closures. I’ve said it before; this is another strong indicator of market confidence.

Solds vs Offers

Now, this is very interesting. For the first time in over a year, the number of sold properties have risen above the number of under offer properties. So while month on month, the number of new offers continue to increase, there has been a big jump in the number of sold properties recently. This important shift in the market is worth noting. It alludes to how the market will trend in the next few months. So if you are curious about what is to come for the Cayman real estate market, then read on, my friends.

Cayman Real Estate Listings

Q3 Predictions

The number of sold properties surpassing the number of under offer properties demonstrates a softening in demand. A drying up of the pipeline, so to speak. Don’t get me wrong, properties are continuing to sell, and in record time too, but the rate at which the demand has been increasing will slow— a relaxing which has a knock-on effect.

Why the slowdown? Summer is here, and there is an exodus of residents vacationing from the island, heading off to reconnect with family and friends afar. A seasonal shift compounded by a lack of tourism, low listings count, and no decrease in pricing. As a result, we anticipate a small slowdown over the next quarter.

This slight easing of the market may present some opportunities for buyers to capitalise on while most are distracted with travel and summer family plans. So take our guidance and ready up your finances and property plan now. A great place to start is Jen Powell’s blog: Mortgages in Cayman.

The minor softening of the Cayman real estate market in the third quarter will be short-lived. We are confident it will rebound after the summer holidays, with the gradual return of tourism, seasonal workers, and new resident population growth. In brief, the Cayman real estate, just like many of us, plans to pause, recalibrate for summer, and then hit the ground running for Q4.

We have gathered this information from multiple sources across multiple sectors to provide a concise overview of what is happening in the Cayman real estate market. We hope this report has brought you clarity, not confusion. And as always, should you have any questions, please reach out. We are happy to provide you with a more bespoke and detailed report. One that is customised to your needs and whatever stage of the property journey you find yourself at.

It’s your property journey. We are just here to make it an informed and enjoyable one. Let’s chat.

Property Valuation: Determining the value of your home

Property Valuations_Jude Holland_Property Cayman

Property valuations are an essential part of real estate transactions. They affect how much a bank will lend a buyer, and similarly, how much a seller can expect to get for their home. So no matter where you are on the property ladder, it is important to understand what the property valuation process entails.

For some helpful advice and insights, I sat down with Chartered Surveyor Michael McGrath, a partner at JEC Property Consultants.

What is a property valuation?

A property valuation is an expert assessment of your current property value.

As a real estate agent, I regularly provide comparative market analysis reports for property owners. These reports show my price opinion to give helpful guidance to those considering selling their home.

A formal property valuation is completed by a Chartered Surveyor. This is a systemised process that carefully considers many, and I mean many different factors that affect the value of your home. The list is long but includes things such as the home’s age, condition, and square footage, as well as location and other comparable sold properties. After an inspection of the property as well as a thorough sales comparison, the Chartered Surveyor compiles a report of findings.

In Cayman, 80% of Chartered Surveyor valuations are completed because of mortgage requirements. Meaning that the majority of the time, the request for valuation comes from the buyer’s financial institution.

What is the purpose of a property valuation?

Most financial institutions will require a valuation when a loan is necessary for the home purchase. The property valuation provides the bank with assurance that the value of the property is not less than what they are lending. Chattels are typically not included in a professional valuation. (Top Tip: Some banks may lend against chattels, so it is an important question to ask when doing your homework on mortgages.)

Outside of being required by the bank, a valuation provides buyers with an assurance that what they are paying is deemed fair value in the current market. A valuation can be an extremely useful tool to avoid real estate decision paralysis, the over analysing and second-guessing of your decision to buy.

And if you are selling your home, a valuation will provide you with a guide as to how much your home could sell for.

“In the current rising market, we are finding many people who attempt selling their property privately are undervaluing their asset. There have been many recent examples of owners listing their properties privately and being inundated with enquiries, only to realise that the list price is much lower than market value. It is difficult to determine the value in this market, so I recommend working with a qualified real estate agent or obtaining an expert valuation report.” – Michael McGrath, JEC

There are many additional reasons why someone would seek a valuation, including refinancing a mortgage, estate planning, tax purposes, or dispute resolution.

What is the cost of a property valuation?

In Cayman, a standard land valuation costs approximately CI $475 to CI $500. A valuation for a residential property starts at CI $675 and increases depending on the size and scale of the property. More extensive properties with larger square footage take more of the Valuer’s time to inspect, measure, and research. Similarly unique properties, with complex features, require a more detailed approach, especially when considering market comparables.

The purchaser is responsible for the cost of the valuation if it is required by their bank or stipulated in the offer to purchase. Similarly, if a seller requests the valuation, they pay the valuation fees.

When does the property valuation happen?

The property valuation process starts with a contract, the offer to purchase. As typically, one of the conditions of a property sale will include a satisfactory property valuation. Once the seller has accepted the offer to purchase, and the bank has approved the buyer, the property valuation is ordered.

The bank appoints a Surveyor to visit the property and prepare their report of findings. A copy of the report is then issued to the bank and the purchaser can request a copy from the bank. (Top Tip: Some banks in Cayman will allow you to choose the Valuer you wish to work with, while other banks will select the Surveyor based on a rota of designated Surveyors. It is another important question to ask when doing your homework on mortgages.)

Current practices place Valuers as the last link in the real estate chain. Engaged after the offer to purchase, and primarily by the bank. This is a missed opportunity as Surveyors bring a wealth of knowledge to any property transaction. Luckily in a real estate market like Cayman’s, where sales are happening in record time for record prices, we are starting to see this trend change.

“We have seen an increase in people coming directly to Surveyors as a first step because individuals are confused what the value of their property is. It’s often challenging to pinpoint a value in a rising market because it is changing every week.” – Michael McGrath, JEC

What does a Surveyor look at during a site visit?

A Valuer visits a property to determine a number of things, including;

  • Size – square footage measurements of the property
  • Number of bedrooms/bathrooms
  • Size of land parcel
  • Condition of the property
  • Additional specifications – upgrades or renovations (solar, new windows, flooring, insulation)
  • Layout, design, key features
  • Site work (pool, pavilion, docking, etc.)

Valuers are trying to establish how your property compares to past comparable sales. For example, if you have completed extensive renovation work on your home, this will be factored into the value when compared to the other equivalent sales.

Tips to prepare for a Surveyor visit.

A lot of people get concerned about how tidy their property is before a Surveyor comes. And while Valuers see past clutter, it is helpful to know what you can do to prepare for the visit.

Michael McGrath from JEC Consultants shares a few helpful suggestions:

  • Access: One of the first things a Valuer will do is measure your property. Access to the entire property should be made as easy as possible to facilitate accurate measurements. Ensuring accurate square footage is critical to the pricing of the home.
  • Minor Repairs: Address any small repairs or maintenance items, including broken windows or doors, damage to sheetrock lined walls and ceilings etc.
  • Details: Provide details on updates or renovations. When a Valuer comes to your property, they are looking for information to support the home’s value. Therefore, any upgrades you completed are important to factor in. Be sure to mention hurricane grade windows and doors, a new roof, spray foam insulation, kitchen or bathroom remodelling.
  • Sales: Private sales can take at least six weeks to reflect in Cayman’s Lands and Survey database. These sales also do not appear in CIREBA, the Cayman MLS system. If you are aware of any recent private sales, notify your Valuer so they can factor this information into their report.

The role of a real estate agent.

As your representative, your real estate agent should be a helpful resource during the property valuation process. We meet the Valuer at the home to provide information on the number of viewings and offers, comparable sales, our market insights and list price rationale.

Michael can attest to this, but I typically reach out to Surveyors for advice before establishing the list price of a home. If needed, I will even recommend the seller obtains a formal valuation to ensure accurate pricing, especially if they are looking to sell within a specific timeframe. Similarly, if I am working with an overseas buyer for an additional layer of comfort, I will recommend, refer, and work with a Surveyor to obtain a valuation for them.

Recommending property valuations and seeking the advice of Surveyors is an extra step, but one I am happy to undertake for my clients. Property purchases are one of the most significant financial transactions we make in our lives, so having an independent and objective opinion is invaluable. As agents, we need to adopt a collaborative approach to protect the interest of buyers and sellers in the Cayman real estate market,

A big thanks to Michael McGrath from JEC Property Consultants for sharing his knowledge of the Cayman property valuation process. As a Chartered Surveyor and Registered Valuer, Michael has over twenty years of experience providing valuation and property development advice. And unfortunately for him, the past three have included me picking his brain!  

Do you have home valuation questions?

Whether you’re a first-time buyer or seasoned property vet, it is important to feel in control of your property journey. Ask questions. Be informed.

I am here to make this process a seamless one for you, so let’s chat.