by Melissa Ezarik
It's not easy to sell your home these days, but it's not all that easy to buy, either. Here's the problem in a nutshell: There's an excess of homes on the market, but the buyers who normally would be scooping them up (thanks to falling prices and low interest rates) can't get financing because the lenders have tightened up rules on who they'll lend money to.
If stressed-out sellers and hard-to-qualify buyers could just join forces they could both achieve their goals. The answer may lie in what's commonly called "creative financing."
"If you really want to sell your home, you need to expand your pool of buyers to include those people who want to buy a home but can't qualify for a standard mortgage at this time. This pool is actually much, much larger than the pool of buyers who can get a mortgage right now."
Scott Christiansen, the senior mortgage originator at Orange, Calif.-based WestCal Mortgage Corp., agrees, "In this market people are getting much more excited about doing whatever they can to sell a property." Every week since the subprime fallout, he says, new financing programs make their debut. And in some cases, sellers are choosing to carry buyers in their entirety.
Ready to get creative about financing to entice buyers? There are three major options:
Three top ways to get creative
Home sellers stymied by market conditions should consider these techniques to spark a sale.
1. See if your lender will allow a mortgage assumption.
In this sort of agreement, the buyer takes over payments on an existing mortgage. If that loan came with a low rate, assuming the loan could be advantageous. Not to mention, the buyer can save on higher closing costs associated with new mortgage debt.
While banks have traditionally not allowed assumable mortgages and some mortgage experts don't see that changing -- especially on 30-year fixed rate loans -- others are seeing some cases of it.
"Most mortgages are nonassumable," says Patton, but "given the challenged market conditions many areas are experiencing, this may be negotiable with the lender."
With a homeowner in financial trouble, for example, the lender would often rather allow the loan be assumed than foreclose on the property, notes Jason R. Hanson, a real estate investor.
Christiansen says a number of large banks do allow assumptions on certain new and existing adjustable-rate mortgages. "I wouldn't be surprised if more continue to do that," he says. "It's worth checking out."
When an assumable mortgage is available and favorable, it would certainly entice buyers.
Before promoting it, though, 40-year real estate veteran Arnold Peck, president and owner of Milford, Conn.-based ERA Property World, says he would make sure both the rate and terms -- such as prepayment penalties -- would make it desirable. "I just had a fellow with a $100,000 prepayment penalty on a $300,000 loan."
For protection, any seller whose lender is allowing a mortgage assumption should obtain a written release from further liability. In other words, never take it for granted that just because the buyer qualified for the deal, he will pay each month. Also check on whether the standard "due on sale" clause can be waived. While Hanson and Patton point out that lenders would have no reason to call a loan due, provided payments are still being made on time (since foreclosure proceedings are costly), Christiansen says it's something to inquire about and that lenders may waive it.
It's also important to consult a real estate attorney if this route is being considered. Mortgage assumptions are often confused with purchases that are "subject to a mortgage." Typically, "subject-to" deals are those in which the purchaser agrees to make monthly payments on an existing mortgage but the original borrower remains personally liable if the new buyer fails to make those payments. Because of that liability, the lenders consent is not required.
Besides being a seller risk (think credit risk and foreclosure), subject-to sales aren't legal, according to Paul Wylie, CEO of Southern California-based Metrocities Mortgage. In addition, Wylie adds, "A lender could find out about an unlawful assumption and call the loan due."
2. Help a buyer build a down payment through a lease-to-own deal.
The buyer acts as tenant for a set period of time (usually one to three years), with some of the rent getting socked away in an escrow-type account to later be applied toward a down payment. In a lease-option situation, the buyer can choose not to buy at the end of the option period, but would generally lose that built-up cash. With a lease-purchase, the buyer must purchase the house in the end.
Either way, the buyer becomes a tenant for now. Only he doesn't "have the typical tenant mentality," notes Patton, because the intention is to one day buy the house.
Yes, these deals are risky.
"Lease purchases are hairy-scary to me because you still may have the buyer walk (and) the seller is still the owner," says Janice B. Leis, a Prudential Realtor covering Pennsylvania, Florida and New Jersey. "And usually both sides are too cheap to hire a real estate attorney. Sellers need to stay away from those legal entanglements that may create more of a financial wrangle for them down the road."
But there are some good potential tenants today, says Stan Lund, owner of a mortgage firm and 2007-2008 president of the Arizona Association of Mortgage Brokers. "A lot of people have lost homes due to foreclosure. They're good people but just had some bad circumstances happen to them. They're good borrowers but maybe they got into the wrong loan, or they took a chance in risk and tried to (own too much) house."
Real estate entrepreneur Bobby Wallace compares lease-to-own deals to "selling someone a home with training wheels." His suggestion for sellers: Do "everything in your power to make the buyer truly realizes that this is a tremendous opportunity to enhance their credit and not waste it."
Sellers can emphasize a number of advantages to the buyer:
• Immediate occupancy, even though it's not being bought immediately.
• The chance to build up a credit score over time and qualify for a better mortgage rate at the end of the lease.
• Forced savings through the monthly rent credit. Wallace's company helps reinforce these positives for buyers through a monthly (and sometime more frequent) newsletter.
Still, it's important for sellers to be cautious in negotiations. First, if the market goes up you could be locked into a too-low purchase price.
And the legalese is tricky. So be sure to hire a real estate attorney to handle the paperwork. With a lease-purchase deal, definitely find a buyer who will likely be able to "get a mortgage down the road," says Patton. "Otherwise you will be suing them in court to buy your home (not a good experience)."
3. If you've got the equity, offer financing yourself.
There are two ways to go:
• Full financing: In this case, the seller would act as the lender and take a mortgage for the total amount owed after any down payment. This is typically the arrangement in such agreements as land contracts, trust deeds, contracts for deed, deeds of trust, notes and privately held mortgages.
With full financing, the deed may be passed along to the buyer upfront or once the contract is paid off in full. Two potential buyer types, according to Patton, are people who have relocated but not yet sold their old home (meaning they can't yet qualify for the mortgage) and those going through divorce whose existing home is tied up in the proceedings.
Wylie says, "We're seeing a resurgence (of seller financing)."
For sellers in a position to do this, Christiansen says, "It's potentially a very quick transaction."
Patton adds that full financing is enticing to a buyer who will save in loan origination fees and other closing costs.
• Partial financing: As the term implies, the seller provides a portion of the financing, typically in the form of seller carry backs, seller holdbacks or second mortgages. A partial financing agreement might mean, for example, the bank lending 80 percent of the purchase price, the buyer contributing a 10 percent down payment and the remaining 10 percent being lent by the seller. "Seller carry backs bridge the gap between conventional financing and more creative seller financing," says Patton. "The seller is essentially acting as a bank offering an additional mortgage."
But would you want to become a lender? Say the buyer payments stop. Unlike with a landlord relationship, you can't simply evict, says Patton. "You will either need to follow forfeiture procedures or foreclosure procedures, both of which cost more in time and money than a standard eviction."
And partial financing means being second in line, should the buyer default. "Second position always loses out in a foreclosure," says Thomas Donnelly, a senior loan officer for Connecticut-based Cross Country Lenders.
Wiley recommends scrutinizing the buyer's financial condition -- income, assets, credit score, etc. -- and making an evaluation on the person's ability to repay. And get a copy of the person's pre-approval from a lender, Lund adds.
It's not a deal for the "average person off the street," says Donnelly. "In a down market you may benefit. But you have to be a savvy investor. I would recommend investment classes. And definitely talk to a really good real estate attorney before going that route."
Most experts advise having a professional (but not the buyer's loan officer) handle the paperwork.
Others, such as Steve Hochman, founder and president of Friendly Note Buyers Inc., advocate writing the note yourself. His book, How to Sell Your Real Estate When Real Estate is Not Selling, offers advice on that front. Negotiable terms include everything from the interest rate and frequency of payments to whether the payments cover principal and interest or interest only. Balloon payments are another term to consider.
"Typically, these loans are interest-only with a balloon due in five years," Wylie says, adding that the buyer would be hoping to obtain a favorable refinance at the end of the term.
"It has been common for a seller to take a carry back second (mortgage) in down markets," says Jody Davis, past president of the Arizona Association of Mortgage Brokers. "This enables a buyer to qualify for a home in lieu of a large down payment. The seller can sell that note but will need to discount the note to sell it. This is basically like creating an annuity for the length of the note. Generally they are amortized for 30 years, to keep the payment low, with a balloon due in five or 10 years. The balloon can't be less than five years or the buyer's lender likely will not allow the carry back.
According to Christiansen, sellers interested in long-term cash flow "may elect to hold the note for a longer term without a balloon."
But having to wait for the total amount of cash is also a disadvantage, Donnelly notes. There's the risk of future foreclosure if conventional bank financing can't be secured when the time arrives.
