There’s more than one way to skin… A real estate deal with seller flexibility to sell the property

Jack and Mary were desperate. Mary got a big promotion in another state, and Jack was looking for a new job in the same city. He was too good to pass up. Mary was a rising star in the health care industry and with the huge pay rise and promotion, it was a job she had dreamed of since she finished graduate school armed with her MBA. Jack was a born salesman and could work anywhere selling just about anything. He was into high-tech sales in the field of high-end electronics and he was close to catching up with a company in the same town as Mary’s new job. One problem, they had a big house to sell in a very slow and falling real estate market.

Jack and Mary consulted with the local real estate ace who had long been their community’s resident real estate expert. They had been in their house for six years and with the past wave of real estate they now had a lot of equity. Because this was happening so fast, Mary moved into a small apartment near her new job. The relocation price offered by the company was too low for what they thought they could get on the market. This option was rejected. With ongoing brainstorming with Tyler the Realtor, the scenarios included Lease, Lease-Buy and Second Seller options. The lease scenarios would be the most dubious of the three. Jack and Mary told Tyler to hold the price and offer to pay the selling realtor a listing fee plus a $2,500 bonus and agreed to pay closing costs and prepaid expenses (prepaid interest, taxes, and security deposits of the insurance) up to the $14,000 offered. . Likewise, Tyler was instructed to offer via the MLS terms of sale to include a second-place seller 5% to 10% of the purchase price. Listing price of $475,000 would mean that Jack and Mary were willing to have a second mortgage of 5% loan-to-value (LTV) or $475,000 x 5% = $23,750 or 10% LTV at $475,000 x 10% = $47 500.
Tyler, the listing broker, had been in discussions with an active mortgage broker in his area and had some clients who could only get a 90% to 95% LTV first mortgage. They had some credit hits, which were holding them back. Each had fully documented income and earned good money. There were valid reasons for their shaky credit history, and they both needed time to rebuild their credit. Tyler showed the house to the two potential buyers who had credit problems. The first couple did not like the layout of the kitchen or the size of the backyard. The second couple liked the house and had similar reserves, but with the flexible financing they thought they could live with it and make changes and improvements in the future when they were able to refinance in the future and get enough money to make some improvements to the house.

Jack had closed up the house and moved in with the furniture in tow to join Mary in their new location. The furniture was put away in the hope that it would not be there for long with real estate agent Tyler on the case. Jack had been actively working on his job search in the new town for two weeks. Tyler was now on the phone submitting the offer to the buyers who needed the seller’s help. Buyers would need Jack and Mary to pay $15,000 in closing costs and prepaid expenses. Tyler was making the deal himself, so there was no bonus involved. The offer was based on a second mortgage held by the seller for $47,500 at 10% interest with a 30-year term and a three-year balloon payment. Payments would be $416.85/month. At closing, Jack and Mary would pay off their first mortgage of $200,000 and get about $188,000 cash at closing and the seller would retain their second mortgage of $47,500.00 paying $416.85/month. Tyler went on to explain that the buyers were putting very little of their own money into the deal and explained the downside risk involved if the buyers defaulted. The only way they could protect the principal on their second mortgage would be to buy the first mortgage or simply take the loss. Tyler and the mortgage broker, with the buyer’s permission, indicated that, in essence, Jack and Mary were underwriting the buyers’ second mortgage loan. It was up to them to approve or deny.

On the weekends, Jack and Mary searched for new houses that would meet their needs. One in particular, due to the weak market, the builder was offering significant concessions and sales incentives, including paying all closing costs and prepaid expenses. With potentially $180,000 in cash available for any purchase, they were seeking an incentive-laden builder’s deal for a $750,000 home, which they could now purchase for $650,000. The lingering fear was what would happen if the payer on the second mortgage defaulted. Since Jack and Mary had to convey the buyer’s creditworthiness, with the buyer’s permission, they reviewed the entire credit package and interviewed them in person over the phone to find out something about the buyers’ character and background. how the credit busts had come about. It turns out that it was a temporary medical problem that put them behind the eight ball and precipitated their credit problems. Jack and Mary decided to accept the deal. Since the buyers had already been pre-qualified, the sale was completed in two weeks.

Jack and Mary, closing funds in hand, closed up and moved into their new home. Six months had passed, and the buyer of his previous residence had made his second mortgage payments on time as agreed. The house had everything they wanted in a house except a pool and spa. The dilemma for Jack and Mary, even though they had gotten an incredible weak market interest rate, they were reluctant to incur any additional debt with the second mortgage now paid off in 2.5 years. Jack received a letter in the mail from an investment note buyer offering to buy the note at a discount since the note now has some “seasoning” on it. Doing the math, with the investor earning a return of over 15% on a 10% nominal rate that skyrockets over the next 30 months, they were offering to buy the note for $42,900 in cash. Just for smiles, Jack, being the super salesman and negotiator, had been working construction quotes with a pool contractor. He had managed to negotiate a reduction of $5,000 and could put up as much as he wanted for $40,000. Pool contractors were slow along with the rest of the housing market. Jack and Mary showed the note buyer documentation indicating six months of on-time payments along with copies of the note and the mortgage. The note was sold for $42,000 in cash. The pool was built the following week. Life was good.

Soft markets can lead to flexible terms that can help complete real estate deals. Keep and open mind. There’s more than one way to skin a… real estate deal.

dale rogers

http://www.sellerhelpbuyer.com

http://www.brokencredit.com