With mortgage credit still tight, and likely to remain that way for years to come, many sellers are finding it more challenging than ever to get their home sold. According to recent statistics compiled through surveys of real estate agents, roughly 33% of all real estate contracts are falling through due to problems with loan financing. Many, if not most would-be home buyers are finding it more difficult than ever to get their mortgage loan approved. But when times are tough, the tough get creative.
Sellers who really need to sell or absolutely have to sell a home for some reason, may want to consider some creative ways to help themselves by helping their buyers. Here are some ideas that are commonly used by creative sellers to help move a home in a difficult market.
1. Seller Provided Down Payment Assistance - If a buyer's lender is reluctant to loan the full amount of the purchase price, a seller can offer to take back a second mortgage for a percentage that would allow the buyer to qualify for their first mortgage, by lowering the LTV ratio on that mortgage.
For example, say a home is under contract for $200,000. The buyer has a down payment of $20,000 or, 10 percent of the purchase price. But, due to an issue with the buyers credit, the lender is asking for 20 percent down, or $40,000.
The seller can consider taking back a second mortgage for the other $20,000, thereby allowing the buyer to qualify for the 20% down payment required by the lender. The lender would have to approved this arrangement in most cases, but that is certainly possible. Every situation is different, but this is certainly something a seller could consider doing to help push the deal across the finish line.
2. Sell "Subject To The Existing Mortgage" - Many buyers have a job and good income, but are unable to qualify for a new mortgage. In today's economy there are a variety of reasons, but one of the most common is buyers who spent months unemployed, and during that time their credit was damaged. Now that they are back to work, they have the income to buy a home but their credit score is just too low.
Selling "subject to the existing mortgage" means that a seller allows a buyer to take over their existing mortgage payments. This can allow a buyer to buy a home, while allowing a seller to get out from under some undesirable debt. This could be a way for some sellers to avoid foreclosure. There are a variety of reasons to sell this way. It depends on the needs of the seller and the terms of the sellers mortgage. The due on sale clause is technically triggered, but no bank will foreclose in this market as long as the payments remain current.
Usually a seller will sell "subject to" for a relatively short period of time, such as one, two or three years, then at the end of the agreed upon time, the buyer must get a new mortgage and pay off the sellers existing mortgage. Thus the buyer ends up with a new mortgage and the seller immediately gets rid of the burden of the monthly payment, with the expectation that the buyer will "cash them out" at a later date.
3. Sweat Equity For Properties That Need Extensive Repairs - I once had a house that had been owned by my parents as a rental property for over 20 years. During those years, very little work was done to keep the house up, and most of the maintenance was left to the "handy-man" tenant who lived there until his death.
Over the years the tenant and my parents had allowed the house to get in pretty bad shape. The tenant had paid a very low rent, and in return he planned to keep the house up himself. But by the time he got older and eventually died, the house had a leaky roof, leaky plumbing, faded paint inside and out, and was badly in need of gutters. To top it off, the furnace in the attic was not working, and the tenant had run electrical wiring all over the house which is a good example of why you should always hire a trained electrician to ensure your home is wired properly.
In short, it was a run-down 2 bedroom, 1 bath, 1000 sq ft cottage that needed a lot of work. I was very reluctant to spend the necessary cash to fix it, as it would have taken years to get the money back at the current rent rate of $350 per month.
After offering it for sale at a very low all cash price, hoping it might attract an investor, I quickly found that all the other investors were thinking the same thing I was. They didn't want to shell out the $22,000 asking price, plus another $15,000 for repairs. So I decided to offer it for sale by owner, with a very low down payment, and no qualifying of credit, only verification of income. I did not care what the buyers credit score was, as long as they could afford the payment.
I sold the home in just two weeks, to a nice young couple that had two small boys and was currently paying $400 a month rent living in a very small, run-down mobile home. To them this house was a mansion. And as luck would have it, the husband was quite a handy man himself.
His whole family were electricians and roofers, so he had all of the necessary skills at his disposal to fix the house up, in exchange for a home that he could own, at a payment of $385 per month, that I actually allowed the buyers to set themselves.
We wrote all of the required renovation details into the purchase agreement, and I gave them one year from purchase to complete a list of required repairs, so as to insure that the work was done as expected.
We went through every detail in the contract to insure that the buyers understood exactly what they would have to do to qualify for long term seller financing. One year after closing, I inspected the property, and their initial one-year mortgage term was extended for the full 15 year term agreed upon, pending completion of the repairs.
Today the buyers are a happy young couple with a nice home and I sold a house I needed to sell. Plus, I put a $1500 down payment in my pocket at closing, instead of paying $15,000 for repairs and waiting years to recover that money. They got an affordable payment that fits their income, and I converted a big hassle into a long term cash flow. Everyone was happy.
Sellers who are willing to be creative can often end up selling their home for more money than they otherwise could have in a straight cash transaction. It pays to understand your creative options and discuss the buyers needs in detail to help everyone structure a deal that will help the seller sell and a buyer buy. When done with everyone's best interests in mind, this type of transaction will work very well.
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Donna Robinson is a regular contributor to Realty Biz News, and has spent many years in the real estate industry. She has been a consultant and coach to major real estate investment companies, as well as helping buyers and sellers find creative solutions to their real estate problems. Donna may be contacted at [email protected]