Solving Real Estate Problems Part II: Selling at Any Price

Buyer and Seller

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 buyorrentmyhomes@hotmail.com.

Paul Krause is a full time real estate professional with Keller Williams in Los Angeles California, DRE #01835890 and CSLB #1029575.

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The Seller Carry-Back Solution

seller-financing

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:

  1. The seller was able to sell the house for $400,000.
  2. The buyer builder did not have to qualify or apply for a $400,000 loan to buy the house.
  3. The builder assumed the monthly payments on the Bank Loan.
  4. 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.
  5. 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.
  6. 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!