Q. have had our house up for sale for about a month and everyone is telling us that we will have trouble selling it because of today's market conditions. We are being transferred to another part of the country and really want to sell the house as soon as possible.
Can you give us some suggestions as to how we can better market the property?
A. ONE of these days, buyers will begin to realize that this is an ideal time to buy residential real estate. There is no question but that this is a buyer's market and deals can be made if properly structured. There are a number of techniques that you can use, including some creative financing arrangements that may make your house more attractive and thus assist you in making the sale.
Here are a number of suggestions for you to consider.
Lower the price. No one wants to take a monetary loss, especially on such a big-ticket item as our own house. However, the market is in a correction phase, and real estate prices have been leveling off. Homes in some communities are not increasing in value as rapidly as they did during the late 1980s and some prices are falling.
Ask your real estate agent for an honest assessment of your sales price. Then run your numbers as to how much it will cost you to keep the house on the market, as compared to reducing the price, making a quick sale and having this cash available to buy another property in the area where you are relocating. Keep in mind that when you buy your next house, you will be in the driver's seat, and presumably can make up for what you have lost on the sale of your house through the purchase of your new one.
Seller take-back. While no one really wants to tie up your cash by taking back financing, the seller take-back arrangement has proved to be a successful tool in assisting buyers to get to closing. Let us assume that you have no mortgage on your property. In that event, you can take back all of the financing, and you will have a first trust (mortgage) on your buyers' property. In effect, you will be the lender, just like any other commercial mortgage arrangement.
The advantages to the buyers are obvious. They do not have to pay points, they do not have to worry about income qualifications and they can save a considerable amount of lender's costs in the transaction. Obviously, you as the seller want to make sure that the buyers can qualify, and you obviously want to take some percentage of the sales price in cash. A good rule of thumb would be that you should lend no more than 80 to 85 percent of the selling price.
If you have an existing mortgage, then obviously you will have to pay this off out of the sales proceeds. But you could take back a second trust, thereby assisting the buyers with the financing so that they would have to come up with less cash at the closing.
However, a second trust is riskier than a first, and you should have tightly drawn documents (a Promissory Note and Deed of Trust) that will give you maximum protection. In fact, if the buyers have other real estate, you may want to put the trust on that other property as well. This is known as "cross-collateral."
Buy down the buyers' loan. Let us assume that you have interested buyers, but they cannot qualify for a loan. You can make arrangements with their lender to "buy down" the interest rate for a period of time, for example, three or five years.
Under this arrangement, for a fixed sum of money to be given to the lender, the buyers will pay a lower interest rate, and thus would be more comfortable in making the monthly payments. Often, the seller puts a fixed sum of money in an escrow account, and these funds are used on a monthly basis to pay the difference between the borrowers' rate and the market rate.
For example, if your borrowers are going to obtain a $100,000 loan at 9.75 percent, the monthly mortgage payment on a 30-year amortization basis is $859.16. If you agreed to pay $90.24 of this payment monthly, this would reduce the effective mortgage rate to your buyers to 8.5 percent -- a very attractive loan.
If you were to agree to make this buy-down for a period of three years, this would cost you $3,248.64. Clearly, that is a cheap price to pay to assist your buyers, and thereby make your house more marketable.
Lease with an option. You can also consider leasing your house for a year or two and giving your buyers the option to purchase the property during this rental period. Often, however, a lease with an option fixes the price now although settlement may not take place for a couple of years. Obviously, this may be attractive for a potential buyer who can obtain the house at today's lower prices. On the other hand, if this arrangement is the trigger for making your sale, it may be in your best interest.
If you use the lease-with-an-option approach, however, you must consider the taxable consequences. If, for example, you buy a new house this year, and cannot sell your old house within three more years, you will lose your rollover tax benefits.
There are many other selling techniques, including land sales contracts, wraparound mortgages and getting involved with your buyers in a form of shared-equity arrangement.
Keep in mind, however, that with any type of creative technique, since we are deviating from the standards, there is always the possibility of risk. Before you enter into any of these arrangements, you should consult your legal and tax advisers, and make sure that those professionals are involved with you from the very beginning of the transaction.
Carefully drafted documents must be entered into, and you should encourage your buyers to also seek professional advice. The last thing you want to happen is for your buyers to claim that you took advantage of them, that they did not understand the transaction and that they were misled by you.
Benny L. Kass is a Washington attorney. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.