"Seller Financing" Terms

More Seller Financing --
& More Flexible Terms

Sellers Terms: Cash, Contract for Deed, Contract/Deed w/Assumption, Conventional, DVA, FHA

--MLS listing

I'm seeing lots more listings like the one above.

If you don't speak "Realtor," here's a quick glossary:

Contract for deed: Buyer makes monthly payments to the Seller, who retains title; title transfers when the last payment is made.

DVA: Department of Veteran Affairs loan. Great terms, zero down -- for those who qualify.

FHA: Federal Housing Administration. FHA-insured loans are the source of financing in today's housing market.

Conventional: a traditional bank-originated mortgage, typically packaged and re-sold to the secondary markets -- at least when the amount is less than $417k (called "conforming") in most parts of the country.

"Would Your Client Consider a CD?"

Low Rates . . If You Qualify

Last year, I heard that question from would-be Buyers maybe 3 times.

This year, I've logged that question three times . . . just this week!

And that, with mortgage rates plumbing all-time lows: just above 4.5% to those with impeccable credit.

Which, of course, is the catch.

Few Sellers Biting (So Far)

Buyers float seller financing, like a contract for deed, precisely because they can't qualify for a mortgage.

Their credit scores may be too low (or non-existent); they may have filed for bankruptcy recently; or they may not have any money for a downpayment.

Unfortunately, all those yellow flags are problems for home sellers, too -- especially the one about limited funds for a down payment.

That's because the risk to the Seller who accepts a Contract for Deed is that the Buyer doesn't perform, and the Seller gets back a property that's much the worse for wear.

On top of that, most Sellers are selling because they need the cash, in one lump sum -- not in monthly payments stretched out over years.

Edina Realty's Crystal Ball

On Tap for 2010: Social Media, and
(More) Foreclosures and Short Sales

No, I don't predict the direction of home prices.

But housing trends are another matter.

Fortunately, if you're an Edina Realty agent, corporate does that for you (or at least helps).

Each year, senior management highlights at the annual meeting -- and reinforces during the year -- the themes and issues it expects to drive the marketplace over the coming twelve months.

From experience, their track record is pretty good.

So what is management emphasizing now?

Training on how to get up to speed on two things: 1) So-called "social media" like FaceBook, LinkedIn, Twitter, etc.; and 2) handling foreclosures and short sales.

If there is an honorable mention, it would be becoming proficient with alternative financing (contract for deeds, assumable mortgages, and various other "seller-facilitated" financing).

Alternative Financing: Back to the Future?

Contracts for Deed & Assignable Mortgages

Last Fall, Edina Realty's excellent legal department identified FHA loans and short sales as the two, big looming issues for Realtors to prepare for in 2009.

Good call.

So, what is Edina legal predicting will be big in 2010?

Alternative financing.

As in, contracts for deed and mortgage assumptions.

Expected: Higher Interest Rates

Both are likely to be more common in the housing market in the coming year(s), for four reasons:

One. Higher interest rates. The Fed's ginormous, $1.25 trillion(!) buy-down of mortgage rates (yes, it's been happening all year) is slated to be phased out early in 2010.

Without that subsidy, rates are expected to float higher. In fact, they already are.

Contracts for deed are are a time-tested alternative to more expensive, less available bank financing.

Two. A continued weak economy.

Consumers who've lost a home to foreclosure typically can't qualify for a mortgage for at least three years.

But if they have steady income, there's no reason why they can't make payments on a contract for deed.

Three. Continued, volatile investing climate.

As investors know all too well, the interest rate on short-term savings is now effectively zero (and has been for over a year). Just because banks are expected to charge more for mortgages doesn't mean that savers can expect to earn more on their balances.

Meanwhile, many investors' appetite for stocks is, shall we say, diminished.

Contracts for deed provide an attractive alternative to home sellers with considerable equity.

And guess what?

Something like two-thirds of homeowners over 60 years old own their homes free and clear!

Four. Buyer and Sellers will assume and assign, respectively, below-market rate mortgages . . . because they can.

Fully 50% of the mortgages made in 2009 have been comprised of FHA and VA loans -- both of which are assumable.

If rates hit 7%-8% in the future, as many expect, being able to step into your seller's 4.75% interest rate is a no-brainer.

P.S.: one more way U.S. taxpayers are going to get shellacked if/when interest rates rise: all those assumable FHA and VA loans will have to be written down by the tens of billions.

Sellers Offer Goodies in lieu of Price Cuts

A Price Cut By Any Other Name

When is a home price cut not a price cut?

When it's billed as "Seller financing" (or other creative Buyer inducements).

In a soft rental market, landlords will do practically anything to entice prospective renters without actually lowering their nominal rental rates.

By far the most popular gambit is free rent (typically, one or even two months). Next most popular are "freebies": free plasma TV, free tickets to Hawaii, etc.

Similarly, home owners who are loathe to take (more) price reductions are starting to offer other Buyer incentives.

Anecdotally, I'm seeing more instances of Sellers who are trying to move upper-bracket homes dangle attractive financing terms: second mortgages on attractive terms; contracts for deed (essentially, a Seller-provided mortgage, but one where title doesn't transfer until the last payment is made); etc.

Which makes sense: one of the big impediments to selling an expensive home today is the premium attached to jumbo loans.

I've yet to see the "Buy this house, get the [collector sports car in the garage free] pitch," but it may very well be coming . . .