This question was posed to me this weekend when my son asked me how I do my job. Working in real estate I work with people from all walks of life. More recently I engaged services with graduate student name Maria (hiding her real identity). Maria is a full time working professionals seeking a graduate degrees through night school and online learning classes. Maria was very concerned about how the deferral of her student loans would impact her affording a new home. This is not uncommon. The government has reported student loan debt well into the trillions of dollars (https://www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-statistics-2017/). When I asked about her plan to pay off her loans she answered that; “…hopefully when I graduate I will be able to apply for a higher paying job.” This leant me to think about my conversation with my son. In the 80’s an important job skill was resume writing. In the 90’s job interviewing. In the early 2000’s it was networking. Although these all have importance I am learning that financially independent people learn how to creatively financially engineer every aspect of their lives. New technologies with crowdsourcing in order to finance real estate, movie, even business acquisition and start up projects is only one example of creative financing. Let’s also not overlook job skills as a fair “trade” to acquire a service or asset. One example would be to take an equity position in the purchase of a house in exchange for providing services to remodel and oversee the construction of the house. One partner buys the house and provides funding for the rehab costs while the other does all the work. This is a strategy I recently used for a house purchase of a single-family remodeling project in southern California. With my skills in sourcing materials and labor, my partner can focus on finding funding sources that ensure this project can be completed. Over the next two weeks I will be discussing additional creative solutions to financially engineer real estate transactions.
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!
Great read, good ideas. Improving a property with less. READ—>
Chinese billionaire Wang Jianlin made his fortune in the country’s real estate market — and now he’s warning that it’s spiraling out of control.
It’s the “biggest bubble in history,” he told CNNMoney in an exclusive interview Wednesday. Bubble is a sensitive word in China after the dramatic rise and spectacular crash in the country’s stock market last year, which wiped out the savings of millions of small investors who thought Beijing wouldn’t allow the market to drop. After struggling to contain the fallout from the stock market debacle, China’s leaders could face a similar headache in the real estate sector. READ MORE HERE—>
An interesting note about millennials is that, at a median income of $35,000 per year, it could take 10 years before a house purchase will be considered affordable, assuming a 20% down payment on a house in order to avoid personal mortgage insurance on a home mortgage.