Is Seller Financing the Right Choice for Me?
I seriously dislike hypothetical questions. I mean, really. I have plenty of people’s real life problems to deal with, so the idea of trying to resolve issues that don’t even exist drives me nuts.
The Client. So when a seller client kept asking me how much his place would have been worth if he’d sold it a few years ago, I hemmed and hawed like a career politician. I knew he wanted to sell to get out of the monthly payment on his seldom-utilized second home. In trying to get to the root of the concerns underlying his hypothetical, though, I got him to divulge that he was more concerned about getting every cent he could out of the place (because he had put so much money into it) than he was about selling it quickly.
What a rarity. A seller who wants top dollar several years after the peak of the market, actually, closer to the bottom of the market. (Sarcasm fully intended.) So I kept asking questions and finally began to glimpse a ray of potential hope. He had (cue heavenly chords here) equity, and a lot of it. He actually only owed a tad bit over half what the property was worth. Now, I thought, we’re cooking with gas! A couple questions later, I learned that he had no need for a big chunk of cash proceeds from the sale. In fact, he revealed, if he could structure a sale to get paid over time, it would actually help him out from a tax perspective.
The fact that he had substantial equity was, in itself, a reason to rejoice, but not necessarily super relevant to my job, i.e. selling his house. What was relevant was that he had both (a) home equity, (b) a willingness, even a preference for getting his cash slowly, over time and (c) an okay-ness with unconventional deals. This would allow me to do things a little off the grid that might just (d) get him a premium price for his property!
The Workaround. By off the grid, I mean seller financing. In our credit-crunched world where even well-off buyers sometimes struggle to find funds, alternatives to a regular bank mortgage can shoot an otherwise mediocre property to the top of buyers’ 'go see' lists. If you can be the bank, you can command a slightly higher price than otherwise. The strict appraisal and other requirements that regular lenders impose may not apply.
So I reviewed the options with him, to see just how game he’d actually be. “Would you be willing to finance half of the sale price?” “Yep.” Would you be willing to carry back a small second mortgage behind a bank loan?” “Sure.” “What about interest rates -- can you match the going rate on the market, whatever that happens to be at the time?” “Uh-huh.”
“Now,” I said, “this is a big one, so I want you to carefully consider it. Would you think about doing a lease with the option to buy?” He was a veteran homeowner and real estate investor, so he knew as well as I did that this meant he’d have to live with some uncertainty (the tenant-buyers could, after all, eventually opt not to buy) and be a landlord for as long as a couple of years. But the flip side was that this option might entice the largest spectrum of buyers. Lots of folks with recent foreclosures would prefer to have their rent money go toward ownership, but need a couple of years to rebuild their credit and save up for their down payment.
Excited by these developments, I went to my office to review his own mortgage paperwork. His mortgage, which he’d had for over 15 years, did not have a 'due on sale' clause like most recently issued mortgages. This guy could even do a wraparound trust deed and literally finance as much as the entire purchase price, if he wanted to.
The Result. So we plowed ahead. I marketed the heck out of the fact that this property was not only in pristine condition, with all the amenities and in a great neighborhood, but that it could also be purchased with no bank mortgage (so long as the buyers would make a substantial down payment), with a seller-financed second mortgage or through a lease option -- the only catch being that the creative options would require a full price offer. In the end, he got every cent he wanted and a lease-option buyer that ended up buying the place with a regular mortgage before the lease was even up. And I didn’t even have to answer the hypothetical question!