The Mortgage Go To Guy!!: Affordable Housing in South Florida: Part 2 -PreConstruction

AFFORDABLE HOUSING?? - Section 2: Preconstruction

So in November, an acquaintance of mine left me a voicemail that she had a "Hot Hot Hot" lead for me...her sister. I was flattered and called her back. She said she was in the middle of meetings so she'd be brief. There was a new community about to be announced in Boynton Beach, Florida that was affordable housing. It was going to start in the low $300's... I let out a little chuckle when she said that number. Her sister was going to get in line for reservations and she wanted me to get the mortgage. She told me she'd call me back later when she was free.

So...I did some digging into the facts of this new community to see how I could help. The rumor that I was told was that GL Homes had seen sagging sales in Canyon - their mega-community/small township in West Boynton Beach. It is a huge undertaking that will definitely alter the demographics of West Boynton. The problem is that the houses started in the high $400Ks without any upgrades or lot premiums. Most of the houses price $500K+. So GL found a parcel nearby and made some deal to move a school and build a park so they could have this space for a lower cost community.... And Greystone was born!

Greystone was to be part of the affordable housing answer in Boynton Beach. It was also likely to satisfy the affordable housing quotas that GL may not meet in Canyon! Nevertheless, I wanted to get to the nitty gritty and how I could help this family get into its dreamhome.

Here's what I found:

Presales were going to happen one weekend in December and people were already clammering to stand in line.
The first deliveries of homes was scheduled for Q1, 2008. Since they've only graded the land so far, I believe fully that this is builder time and not actual time so Q2 if we're lucky.
These were all owner occupied homes - no investors - to protect the homeowners
Reservation fees were $3,000 non-refundable
10% Deposits were required once a model was selected
Then, 10days later lots would be released 10% of the lot premium would be due at that time
A meeting with the design group would then require 10% down on all upgrades. Minimum upgrades expected to range $50-60K on the smallest model
Smallest Model was 1500sf, 3/2/2, ranch - $330K

It all sounds normal, right? All 500 homesites sold out in 5hours and the news reported that GL made $5B - that's a B as in Billion - for the builder.

So... then I did the math.

Reservation fee $3,000
10% down on small model $33,000
10% on lot premium $0 for arguments we'll say no upgrade here
10% of minimal upgrades $5,000
For a Grand Total of $41,000 due within 30 days

Still sounds normal? Ok... let's break this down

These were billed as AFFORDABLE HOMES. Advertised as suitable for some MODERATE INCOME TRACT buyers in Palm Beach County. The qualification for Moderate Income Tract for a two income family in Palm Beach County has a ceiling... a CEILING... of $96,000 per year! Divided by the deposit is 41.8% of the annual income of this family is spent on the deposit.

That $96,000 is GROSS income... not Net, not Adjusted Gross... GROSS Income. So at $96,000, that person is in the 25% tax bracket and owes around $7,000 in income tax given just the standard married filing jointly deduction and one child. This nets the income down to $89,000 but raises that percentage to 46% of the annual adjusted income!

Then, if you look at the annual average savings of a US family of 2% - let's ramp that up to 5% for argument's sake - and we're only seeing roughly $4500 socked away of the take home pay! So the deposit is 11 years of savings!!

Then, if somehow the family has the cash to put another 10% down at closing, the loan amount would be $304,000. The interest only payment at 6.25% is $1583 per month. Add $435 per month for taxes. Another $225 per month in insurance. Another $100 per month homeowners association. Total PITI (Principal Interest Taxes and Insurance) payment is $2,343. It all looks good with a 29% front end ratio... which is a little high but probably doable if you went stated income and used only the back end. But then that leaves only $1,657 per month for all the rest of the obligations before you reach a 50% back end ratio!!

How is that going to work for most people? Think about it... no savings = running up credit card debt!... no savings = no PITI reserves... no savings = no asset requirements... none of this = no loan

So the builder came out last month and said that they fully expect 20% of the contracts to just be cancelled. Now what would give them that idea??

I don't fault the builder... don't get me wrong. Canyon is beautiful and so are the rest of their communities. But what kind of answer is this to the problem of affordable housing? Why were people so elated at this "affordable" community??

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David A. Podgursky, MBA
The Mortgage Go To Guy!
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