Real Estate Information

One of the most confusing part of the home buying process for new homeowners is the concept of seller paid closing costs or seller concessions. Seller paid closing costs allow for less out of pocket expense for the home buyer, but are rarely truly seller paid. Seller paid costs are actually buyer borrowed. Regardless, there is still a great benefit to having them.

Let s examine real quickly how they work. Assuming an asking price of $100,000 with the buyer using an FHA loan that has a maximum of 6% in seller paid closing costs, a buyer could offer $106,000 with $6,000 towards closing costs. The seller is going to net out at the same amount, so they usually don t care and it helps the buyer close easier. The buyer could also offer the asking $100k with $6,000 going towards closing costs netting the seller $94,000. Considering the way the real estate market is, that could easily be accepted or there may be further negotiation.

What can closing costs go towards? Title fees, property taxes, loan costs including lender fees, origination and rate buydown, homeowners insurance, up front mortgage insurance premiums and VA funding fees. They can t go towards a required down payment.

Unused closing costs go back to the seller. Sometimes on lower priced properties the lender maximums can t be used up. A savvy buyer should lower their offer by the unused amount. On purchases, overages of seller paid concessions can never be paid to the buyer as cash back.

Why not just pay the closing costs? Lenders want to know where the money is coming from and in today s marketplace those funds have to be sourced (where did the money come from) and seasoned (how long has the money been there). If you don t have the funds already in place, or need to use your savings for a down payment seller paid closing costs are a great way to get the loan approved.

Lenders limit the maximum amount concessions can be. For VA loans, the number is four percent FHA mortgages are 6%. Conventional loans vary dependent upon the lender. Be sure to check with your lender when you tender the offer. Closing costs must be negotiated at the time of the offer, though it s possible to go back and amend the contract.

Seller concessions are not a right. Remember buying a home is a negotiation and you can succeed more often by presenting an offer that benefits both sides. Don t rake the seller over the coals on price and then add in seller paid concessions. You may get the offer accepted, but if problems develop down the road like you need to extend the closing, you may find the seller to be less than accommodating.

For potential homeowners who want to minimize their out of pocket expenses, negotiating seller paid closing costs is a great way to do it.

In 2006 the world s oil rigs pumped out crude at a rate of nearly 85.5 million bbl. a day. They haven t come close since, even as prices have risen to USD 115 per barrel and are forecasted to reach USD 150 per barrel twelve months from today (source: www.oil-price.net ). All of which raises a question of potentially epochal significance: is it all downhill from here?

It s not as if nobody predicted this. Survivalists, despisers of capitalism, a few billionaire investors and a lot of respectable geologists have long cited the middle to the end of this decade as the likely turning point. Governments and the oil industry have typically dismissed such talk as premature. There have been temporary drops in oil production before, after all. In most official scenarios,

production will soon rise again, peaking at more than 110 million bbl. a day around 2030.

But the official scenario doesn t seem to hold water - oil if you prefer - anymore. Even taking the 2030 deadline as true, the implication is that the optimists think we have less than three decades to go. But the fact of the matter is that the word from producers is getting gloomier by the day, to the point that many of them openly agree that oil production will never top 100 million bbl per day. The International Energy Agency warns that new capacity additions will not keep up with declines at current oil fields and the projected increase in demand, forecasted at 1.5 percent more in 2008 or 1.3 million barrels a day.

This isn t quite the same as saying that oil production has peaked and is about to start declining sharply. The big issues are not so much geological as political, technical, financial and even human-resource related. All these factors delay the arrival of oil on the market, meaning that production would not so much peak as plateau. But with demand rising sharply, especially from China and India, even a plateau could be precarious.

The world is not running out of oil. There are massive reserves available in the Alberta tar sands, Colorado shale, Venezuelan heavy oil and other unconventional deposits. The problem is that most of this oil is difficult and expensive to extract and even harder to refine, and is not likely to account for a significant share of global production anytime soon.

Almost everybody agrees that the pumping of conventionally sourced oil outside OPEC has peaked already or will peak soon, a reality that even discoveries like the recent 8 billion-bbl. find off the coast of Brazil cannot alter, because production from so many existing fields is declining.

The big question mark is OPEC, which represents the oil powers of the Middle East and a few other big exporters, and which currently accounts for 41 percent of world oil production. Every optimistic scenario assumes that this share will rise dramatically in the coming years. And of course the implication of this is that if things turn out well, North America and Europe will become substantially even more dependent on middle-eastern oil.

Then there is the gloomy view, postulating that Saudi Arabia - OPEC s top producer - cannot pump much more oil than it does now. In fact, in recent times Saudi out put has dropped from 9.6 million bbl. per day to 8.6 million, despite rising prices.

So far the answer from OPEC leaders has been that high prices are the fault of speculators and the falling dollar, not low production. They cite stats after stats showing that there is more than enough oil for sale right now. The price pressure, they point out, is coming from financial participants in futures markets. All this may be true, but the reality of things, however, is that if OPEC members are not able to boost production in the coming years, it will be impossible to keep blaming the traders as prices rise.

Voices are loud out there that cheap oil is the essential fuel of modern capitalism, which will founder without it. On the other hand, a more hopeful take is that innovation is the essential fuel of capitalism, so that high oil prices will drive rapid advances in conservation and alternative energy. Either way, the beginning of the end of the oil era may be upon us well ahead of schedule.

Luigi Frascati

luigi@dccnet.com

www.luigifrascati.com

Real Estate Chronicle

Labels: ECONOMICS # posted by Luigi Frascati @ Wednesday, April 23, 2008