Motivation. It’s a 2-way street. Both the buyer and seller have to have a compelling reason to enter into a contract to buy/sell a home. So does that mean we should assume that sellers that try to get a higher than market price are unmotivated? It depends. One of the main reasons I have found a seller might be asking a higher than market price is not only to test the market, but because they don’t have any other source of funds to close the deal. A seller might either have (1) over mortgaged the property, or (2) overpaid for the property, and in both cases will need a certain amount of money to “untangle” the deal out of their lives. In this article I am going to focus on sellers, and specifically how to earn a sale with an above average market price. And the strategy that is the most enticing is known as seller financing. Seller financing simply stated is a term of the deal that the seller offers to allow the buyer to make payments for the property with minimal underwriting (and sometimes no underwriting) for the buyer to take equitable title to the subject property. This enticement can usually create an emotional motivation for buyer simply because the buyer now doesn’t have to qualify to obtain a home loan. Highly motivated sellers will make qualifying to finance the home easy. Additionally, a buyer who doesn’t have a perfect 800 credit score and can’t qualify for a competitive rate will now have more leverage negotiating an affordable monthly mortgage payment by negotiating with the seller direct, rather than being told how much by a traditional mortgage lender. For example if the going price for 10 year old 3 bed 3 bath home is roughly $300,000 and the seller’s asking price is $319,000 the extra $19,000 is the cost of getting flexible terms. Some would argue the extra $19,000 makes the interest and monthly payment bigger, which is true. So there is a trade off. The seller wants a higher price for the property so by offering flexible terms the seller motivates buyers who want the house but might not be able to afford the the monthly payment if they use a traditional lender. Some seller financing terms I have seen are:
- 30 year amortization, balloon payment due in 5 years.
- 30 year amortization, balloon payment due in 10 years.
- 15 year amortization, balloon payment due in 3 years.
- Interest only, 30 year amortization, balloon payment due in 7 years.
The balloon payment simply means that the remaining loan balance owed is due at the end of the period agreed upon. Whether a buyer choses a 3, 5, 7, or 10 year balloon payment the financing program structured by buyer and seller should be comfortable for the buyer so they will be able to refinance the property in the future.
If you know someone with a real estate problem or questions feel free to email Paul at his email address at firstname.lastname@example.org.
Paul Krause is a full time real estate professional with Keller Williams in Los Angeles California, DRE #01835890 and CSLB #1029575.