It’s tough going for sellers in many parts of the country.
You’ve got developers dropping prices and increasing freebies in an effort to get rid of some of their excess inventory. They’re doing anything they can to sell homes in their development, even if it means their other buyers will suffer from the price reductions.
And then you’ve got buyers who are asking for the moon and beyond. I received an email from a home buyer wondering if it was okay to ask the seller to pick up closing costs to the tune of 6 percent.
Although I’m wondering what kind of closing costs run to 6 percent of the sales price, I advised the buyer to ask anyway and see how desperate and anxious his seller is to sell his house.
Where do you draw the line if you’re selling your home in today’s market? It depends on how tough your local market is and how much selling stress you can stomach.
If you’re in Miami, as I was recently, and you see new condos selling at auction for 50 cents on the dollar, even as 26,000 new condos are being built, you might need more than a simple antacid pill.
On the other hand, a little financial cocktail might go a long way toward soothing your nerves and attracting a buyer.
Seller financing is a tried and true method for sellers to bring buyers to the table.
It doesn’t work all that well when you can go to any mortgage lender on the street and get a 30-year fixed rate loan for zero costs at 5 percent. But in the current market, seller financing is a much more viable option.
Right now, banks and mortgage lenders are under the gun to make sure that the people who are doing the borrowing are “qualified.” They’ve raised the credit scores required to get the best interest rates, and in some cases, upped the fees as well. They’re also requiring more in the way of a down payment.
If you’re a home buyer, especially a first-time buyer, all of these moves may have put homeownership out of reach for the time being.
Which would be okay, except if you have your heart set on becoming a homeowner in the near future.
This lending gap is an opportunity for sellers to step in and offer to finance a property to a qualified home buyer for a period of time, say two to five years. That’s enough time for the buyer to build in some equity and gain the financial traction required to refinance with a conventional lender.
But you can’t just offer seller financing to any buyer who walks through the door. As a seller, you have to be responsible. You don’t want a buyer who you don’t think has the income to afford the payments.
So, do your due diligence. Pull copies of the buyers’ credit histories and make sure you have them submit their bank statements for the past six months, so you can see where the cash is coming from. If they’re getting the down payment money from their relatives, make sure you know the check has cleared if your name is on it before you close.
Why would a borrower want you to provide seller financing? Traditionally, seller financing is easier and cheaper than going through a conventional mortgage lender. You’;re not going to charge 1 to 2 percent in fees. You may not require the borrower to have as much in the way of cash reserves. You may even charge less interest upfront, or structure the loan to be more favorable to the buyers in the beginning.
But this can be a win-win scenario all around. First, you’ll have sold your house. You can get a higher rate of interest on your cash than if you left it in the bank. And, you’ll have the first lien filed against the property, so if something happens, you can foreclose and take the home back.
It’s important to let the world know that you’re offering seller financing. So, if you’re using an agent, make sure it gets into your listing information in the local multiple listing service. If you’re selling by-owner, make sure you get the word out.
Finally, don’t try to create a seller financing package on your own. Hire a real estate attorney to draft up the mortgage documents, negotiate the terms of the agreement, set up title insurance, handle the closing, and record all the necessary paperwork. And make sure you circle back with your accountant so that you’re not in trouble with the IRS and your state tax authority.
But for sellers who are desperate and anxious, seller financing can make a lot of sense – and finally help you get a good night’s sleep.