Janis Peterson, GRI, ABR, CSP Realtor®
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Using `Creative Financing' Can Help Buyers, Sellers Alike
A growing number of homeowners are offering 'creative financing' to make their property sell faster.
Some sellers who hear the term 'creative financing' immediately conjure up images of slick, no-money-down gurus who host their own late-night infomercials on cable TV. But while those types of sales can pose some serious hazards for consumers, a well-structured transaction that uses creative financing can benefit both the buyer and the seller.
The most common type of creative financing involves the use of a second mortgage, often called a seller "take-back" or "carry-back."
To illustrate how a take-back works, assume that Buyer Barbara wants topurchase Seller Sam's home for $150,000, with a 10 percent down payment of $15,000.
However, Barbara only earns enough to qualify for a $125,000 bank loan -- leaving her $10,000 short of the amount needed to complete the transaction. To close this financing gap and complete the sale, Seller Sam could "get creative" by taking back a $10,000 second mortgage at 10 percent or at any other mutually acceptable rate. The mortgage could require Barbara to make an interest-only payment of about $85 each month to Sam, and also call for Barbara to pay it off in a $10,000 lump-sum any time within the next three or five years.
Buyer Barbara and Seller Sam would each benefit from this creative-financing solution. Barbara would get to buy the house even though the bank wouldn't finance the entire purchase, while Sam would be able to sell his home quickly and use the proceeds to buy another house.
Seller Sam also would earn 10 percent annual interest on the $10,000 second-mortgage he takes back -- a much better rate than he would earn by putting the money into a savings account or certificate of deposit -- and know that Buyer Barbara will write him a check for the full $10,000 sometime within the next few years.
Importantly, Sam would have the comfort of knowing that the second mortgage he holds on the property would allow him to foreclose on Buyer Barbara and regain control of the house in the unlikely event that Barbara stops making her monthly payments to Sam.
Even if Seller Sam didn't want to carry-back a second mortgage, he could utilize other tried-and-true creative-financing technique to sell his home faster.
For example, Sam could offer to pay for all of the "closing costs" associated with selling his home. Closing costs are basically transaction-related fees that are typically split between the buyer and the seller.
A buyer's share of closing costs can total several thousand dollars and usually must be paid in cash -- a major problem for many buyers, especially those who can barely afford to scrape up enough money for a down payment.
Conversely, sellers have the option of having their share of closing costs subtracted from their resale profit. As a result, they don't have to reach into their pockets in order to cover their portion of the expenses.
By offering to pay all closing costs himself, Seller Sam would add an important dimension to his marketing efforts and his home would appeal to a far wider group of buyers. His chances of making a quick sale could vastly improve, and so could his chances of selling for top-dollar.
As another alternative, Sam could offer a "lease-option" on his home.
A lease-option is simply a combination of a lease -- usually for one to three years -- and an option for the tenant to buy the home anytime during the lease-term.
For example, Sam could sign a lease-option with Tenant Tracy that calls for Tracy to rent the house from Sam, but also gives Tracy an option to purchase it for a mutually agreeable price anytime over the next two years.
If Tracy eventually decides to buy the house, Sam will have accomplished his goal of selling the property, and in the meantime, also will have collected a fair market rent for the home. Sam's net profit would be boosted even more because he would qualify for all the special tax-deductions that only landlords are allowed to take.
Should Tracy decide that she doesn't want to buy the house and instead allow the option to expire, Sam could sign a new lease with Tracy or another renter, move back in himself or put the property up for sale again. Since two years would have passed, the home would probably be worth much than it is worth today - increasing Sam's resale profits.
There are many other creative-financing techniques that can help buyers and sellers alike. A good real estate agent can help formulate a plan that best fits your personal financial situation and goals.
"Real Service in Real Estate." For a personal consultation on buying or selling real estate, Janis Peterson, GRI, ABR, CSP Realtor® can be reached at (610) 642-3744, e-mail: email@example.com. Prudential Fox & Roach Realtors® is an independently owned and operated member of The Prudential Real Estate Affiliates, Inc.
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