San Diego Home Info by Gretchen Pagnotta
This article caught my interest. I have helped sellers carry mortgages in the past. It can be a great way to sell a home and help borrowers. The borrowers that benefit the most are people who own their own businesses and/or get paid on 1099′s. The lenders put these people through so much red tape that they become discouraged and many have decided not to move in the current market. The last time my husband and I refinanced we were overwhelmed with the amount of documentation we had to provide the lender. That is because as Realtors we are paid on a 1099 as independent contractors. People who have an income that has fluctuated over the past few years are also having a difficult time providing to a lender they are credit worthy. How about all the people who have had to short sell their home? If these people have income and can prove their ability to repay a loan to the satisfaction of a seller a carry back may be a reasonable way to structure a sale.I had a seller who changed employers and moved out of state. He made the decision to short sell his home as he could not get it sold due to the decline in value and could not lease it for anywhere near his payment. He has a steady job with a Fortune 500 company now and desperately wants to purchase again. As is always the case it is imperative to get the “big picture” when considering this. You do need equity in the home. If a seller does not need all the equity but would benefit from income it is an excellent way to structure a sale to be a “win-win” for both parties. Here is the article which appeared in the NY Times:
When the Seller Is the Lender
By MARYANN HAGGERTY
Published: June 2, 2011
MORTGAGE underwriting is tight, and home sellers are anxious to unload properties into a stagnant market — it sounds as if it could be time to consider seller financing.
But such transactions remain rare, according to market participants, largely because of eroding home equity.
In seller financing, the owner of a property holds the mortgage for the buyer, usually for about five years, with a balloon payment after that. For individuals who don’t need all the cash from a sale up front, the arrangement provides interest income, can delay or reduce capital-gains taxes, and gets a property off their hands.
For the buyer without a bank loan, it makes a purchase possible. Such deals were popular in the 1980s when mortgage rates topped 17 percent. (In New York, there have been recent instances of developers’ offering financing, especially in newer condominiums, but that’s a different market dynamic.)
Because a seller who acts as a bank has to be able to clear his own mortgage without the buyer’s cash, he needs equity — that is, he needs to own most or all of the property. Falling home prices in recent years have cut equity dramatically, said Mike Litzner, the owner/broker of Century 21 American Homes, which has 12 offices on Long Island. In this market, “the average seller lost 25 percent of equity from the peak of the market to today,” he said. “That loss of equity makes it harder for the average person to even consider financing.”
Century 21 recently released a survey of its franchisees and salespeople nationally; it found that 89 percent reported some customers’ having difficulty obtaining loans in the last six months.
Seller-financed deals do sometimes pop up, said Neil B. Garfinkel, a Manhattan real estate lawyer. His firm is handling a co-op purchase for a buyer whose mortgage from an institutional lender fell through. There was a quirk in the building’s finances that meant it didn’t meet underwriting standards. The seller stepped in, and it appears the deal will close.
That situation, he said, underlines a question that both buyers and sellers should ask as they consider owner financing: Why won’t the bank put up the money?
For the buyer, that may mean weighing whether the discovery of an environmental problem cools ardor for a house, or whether a low appraisal signals that an offer merits renegotiation.
For a seller who is in a position to provide financing, the biggest concern is whether the buyer is truly creditworthy. “Presumably the seller does not want to end up with the property back,” Mr. Garfinkel said.
Keep in mind that although such a transaction might seem less formal than bank financing, it shouldn’t be treated that way, said Ilona Bray, a lawyer and the co-author of “Selling Your House in a Tough Market,” published by Nolo.com.
“Get ready to really delve in and investigate” the buyer’s finances, she advises would-be sellers. Self-employed people are having a tough time getting mortgages now, even though they might otherwise be good risks. The seller should ask for several years of financial records, plus explanations for any less-than-perfect credit report.
Make sure deeds and other legal papers are filed according to local laws, Ms. Bray said, and ensure that documents lay out exactly how and when payments are due and what the penalties will be for late payments. “This is the kind of relationship where people could feel it’s casual,” she said. It’s not, and everyone involved must understand that defaults can lead to foreclosure.
From the buyer’s perspective, she said, if you’re considering such a deal, it’s probably because you realize you might have trouble securing a conventional loan. If that’s so, get your financial documents in order, and be prepared to ask sellers if they have flexibility. “Everything’s open to negotiation in the real estate world,” she added.
Do you have questions in this article? Let me here from you!