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.
It is so easy to fall in love with the “money shot” that it can cause a home buyer to forget how to evaluate a home purchase. In real estate it is always emphasized that “location, location, location” is what counts. And there is truth to that. Which is why I wanted to share this home in my blog. At first glance the home looks like an impressive compound. It’s got that elegant “money” look to it. So thanks to Google Space and Street View technology I was immediately shocked to find the front gate banged up and entrance featuring an old office chair prominently on display. In addition the seller excluded photo angles that reveal a barren desert dirt front yard, which if I were to buy this property would end up becoming a dust bowl on a windy day – not uncommon for California! The street view picture across the street is the neighbor across the street – a home that is quite a bit different in dimension, style and size. Which would lead me to ask “who would buy this property?” Honestly there always a buyer for any home at the right price, but it is clear the featured sale property is well overbuilt for this neighborhood and is quite possibly the biggest and nicest in the neighborhood. So how would that work out if you were currently the owner trying to sell this house? Would you know someone who is willing to buy this home? It’s possible. If you want to avoid surprises one of the questions home buyers need to ask themselves is, if their situation changed would they want to be the one having to sell this house. Again, there always a buyer for a home at the right price, but being that seller is easier said than done. In high density city areas we can usually find plentiful comparable sales. But in my experience the further your travel from urban sprawl the less information will I find for a given neighborhood. That doesn’t bode well for buyers that need a loan to purchase a home if the bank has to stretch over many miles and calendar months of home sales to determine a fair market value. A lack of sales data sure will make the sale of a property more difficult to compel buyers. In this case, this seller might do just fine selling this beautiful home and find themselves having no difficulty finding a qualified buyer. The point is as a buyer, you have to picture yourself as the potential seller first to ensure there are no surprises as a buyer. Asking lots of questions about real estate trends in a neighborhood is something a competent and qualified realtor is happy to do. In my case I even shake hands with the neighbors face to face by door knocking a few times a week just to keep up so that I know what buyers and sellers are not only doing, but where there thinking is so that new buyers get the best possible information to make an informed decision. Avoid surprises by slowing down, taking a closer look, imagine yourself the owner and potentially seller first – this is a great way to avoid pitfalls and start your home buying process.
To get more information on purchasing a home and home trends feel free to write me at email@example.com.
Who will forget the week of messages we just experienced! First the (phony) message that set off innocent Hawaiians about ballistic missiles causing panic when instructed to to seek immediate shelter! Then football watchers at this Sunday’s Minnesota Viking game wearing Apple Watches being sent messages by their Apple Watch that they might have a heart issue which was actually caused by the excitement (and resulting increase of blood pressure) from the miracle play that resulted in the Vikings victory over the opposing Saints. Messages people!!! These events were one more reminder to me that STICKING TO THE PLAN is the only thing we can ever depend on. This summer I was managing a single family remodeling project that was in its early stages. An agent and a painter came over to look over the house and told me that I would be lucky to get around $525,000 when the house was finished. I disagreed. I told them that the house would be undergoing several floor plan changes that would re-create how the house could be used, thus giving it greater value. Eyes would roll as you can imagine. This didn’t deter me. I was the one with plans in hand and after s
eeing how several similar remodeling projects had performed in the marketplace my plan was grounded reasonable expectations. The target future value I held onto was $575k. At times the project didn’t go well. Work was slow because of the crushing summer heat and the workers just weren’t as productive as when temperatures were cooler. Labor costs began to exceed budget. It severely tried my patience. But by the time the ‘heavy lifting’ was finished, opinions changed. Agents and vendors alike remarked that $575k would be a good asking price. Then, a nice break from the heat helped further advance progress so that hardwood flooring and kitchen cabinets could be installed. The tide had turned. In the end we finished over budget, with the house taking three months to sell and earning a $595k sales price at closing. Sometimes you’ll work a project and you’ll field options that will differ from your plan. If you’ve done your homework, those options are unqualified and should be disregarded as nothing more than a mixed message. Mixed messages can cause chaos and confusion because they often lack clarity and grounding in facts! My job was to maximize the value of the house so that when I finished the house it would have a value of at least $575k, potentially more. When we sold the house above my target value it was one more reminder that STICKING TO THE PLAN is the only thing you can ever depend on.
PS. I thought you would appreciate the before and after pictures this house project!
California’s passing of SB1069 (link here: http://sd10.senate.ca.gov/news/2016-09-27-gov-brown-signs-wieckowskis-accessory-dwelling-units-bill-provide-more-affordable) took the old concept of renting out one’s garage/storage space and made it legal. Although restrictions exist, the new law is one more sign that housing affordability is just as much a concern for Californians as housing availability. Homeowners looking to reduce the cost of home ownership have always considered whether to rent out a room or make an illegal garage conversion. With the law being put into effect it is likely to keep the residential fixer-upper contractors busy for a while. There are 3 BIG advantages a garage conversion has over renting out a room in your main house. My top three are:
PRIVACY – There is nothing more odd than sharing a space with a roommate in your home, if its your home and its been years since you have non0family roommates. The occasional run in at the bathroom or refrigerator can be as meaningless or annoying as you make it out to be, but you have to prepare for it either way. For some that will feel odd and even find yourself asking “why am I sharing this house with this person? Oh yeah, that’s right – Because its the only way I can pay the mortgage and have enough money left over to have a life!” The detached garage/storage space solution eliminates the social complexity of sharing space because everyone has their own space and well defined boundaries.
SCHEDULES NEVER CONFLICT – Come and go as you please in a detached garage/storage space situation but NOT so when you rent out a room. If you have a renter that keeps off hours, to some extent so will you. An owner really needs to focus on lifestyle questions in the renter interview process to better understand if a roommate will functionally “work out” or result in a toxic living environment. Additionally, schedules can change. A change in a persons job, profession, relationships, etc. can turn a once functional lifestyle arrangement into dysfunctional arrangement if both parties are not willing to make compromises.
PAYING YOUR FAIR SHARE – A detached garage/storage space arrangement makes it easier for the renter and the owner to determine what a fair rent is because the market can be compared much more easily for a converted garage. Renting a room is almost impossible to find a comparable rent because no two houses are the same. Additionally some owners do not want renters using in-home laundry facilities and would rather they go to the local laundromat to help keep utility usage down. Splitting utility billing can also be tricky because renting a room (maybe 100 square feet) is not really renting a room but also the hallway, the living room, the family room, the kitchen, etc. By going the converted garage/storage space route an owner and renter can agree more easily on what parts of the property will be included in the lease and which ones are not.
So now you have made years of payments to your mortgage and slow steady appreciation of the market has improved housing prices. But a recent layoff has just caused a sudden job loss. The severance being offered will only last a few short months. A review of personal finances reveals that the house payments that the job supported will be almost impossible to carry through the transition from your outgoing job to a new one. So you make the decision to downsize your lifestyle till you get solid footing with a new job. However after you put the house up for sale you notice the offers are well below your asking price. This is where selling TERMS through a Seller Carry-Back could make the difference between selling your home and not at all! This is a real scenario:
Selling Price = $400,000
Bank Loan = $150,000
Seller’s Equity = $250,000
You up one morning to find an email from a local builder that believes the house has tons of potential. Their plan is to add square footage and remodel the kitchen and bathrooms based on the pictures in your listing. But the buyer thinks the price is too high. Additionally the builder already has multiple projects in process and cannot borrow all of the funds he would need to finance the purchase and remodeling. What can you do? Offer TERMS. Here is how this recent sale took place. A seller made an offer to the builder buyer, so that, if the builder would pay the $400,000 asking price, the seller would offer a promissory note of $250,000 with no interest and no payments for the amount of the Seller’s Equity till the builder completed the remodel and sold the house. The builder would assume the payments on the sellers existing $150,000 Bank Loan. The builder took the deal and opened escrow. With the house payments being assumed by the builder, the seller could breathe a sigh of relief. The whole project would last six months, and resulted in the creation of a newly remodeled home that sold for over $730,000! The seller closed with the builder for the $400,000. The builder paid back the $250,000 promissory note (the house equity) and the $150,000 Bank loan when he sold the house to a couple that was looking for a new home in that neighborhood. By selling the house with TERMS the seller created several opportunities:
The seller was able to sell the house for $400,000.
The buyer builder did not have to qualify or apply for a $400,000 loan to buy the house.
The builder assumed the monthly payments on the Bank Loan.
The builder was obligated to a “Promissory Note” for the seller’s equity ($250,000) with No interest and No payments till he finished and sold the house.
The builder only had to obtain a construction loan for $125,000 to remodel the house to improve the property. This reduced the builders out of pocket borrowing costs and reduced the amount of leverage he would need to re-sell the house.
The buyer builder made a profit in the tens of thousands of dollars by only borrowing $125,000 using a seller-financing and a seller carry-back strategy, instead of borrowing the entire $525,000 to achieve the same sales price of $730,000!
This deal is an example of a complete WIN-WIN for both buyer and seller and solved the problem for each party involved!
I stumbled on this kitchen from Veneer Designs – it’s this fabulous home in Playa Vista that is such a classic boho Southern California style. The best part of this kitchen is the antique rug. It adds such a bright spot to this bright white kitchen. Read on —>