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Old 10-06-2007, 09:29 AM
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Post Creative Financing Can Give Sellers an Edge

People move to new homes for all sorts of reasons, even when the market is slow. In the case of Seth A. Koch and Barbara Bellman of Silver Spring, the decision was spurred by aching joints.

"My knees and my wife's hip are getting to be where we need to be on a single level," said Koch, a retired veterinarian. They're moving from their three-level house in the Sligo Park Hills neighborhood to a D.C. condo.

The couple decided to try a two-fisted marketing plan, offering the house for sale or for rent with an option to buy. "With the market the way it is, we thought it would be a viable option," Koch said.

As the local housing market remains weak, we can expect to see more such creative and flexible offers from sellers, including such once-popular tactics as seller financing.

In Silver Spring, Koch and Bellman are asking for a sales price of $659,000 or monthly rent of $3,300. The rent is not much less than the monthly cost if you were to buy, but there's no down payment.

If a buyer put 20 percent down and financed the remaining $527,200 with a jumbo mortgage at 7 percent interest, the principal and interest payment would be $3,508. The renter would save by not having to pay property taxes and homeowners insurance (but would not get the income tax deduction for mortgage interest). If someone can afford the monthly payments but not the $131,800 for the 20 percent down payment, the rental option is the way to get in -- and for the current owners to get out.

The tactic allows the home to be exposed to two different audiences -- renters and buyers. "The MLS [multiple listing service] allows you to do both, so you get double exposure for it," said Marin Hagen, an agent with Coldwell Banker in Georgetown, who is handling the listing. Typically a portion of the rent can be contributed toward the down payment. The size of that portion is subject to negotiation.

If you're a buyer struggling to come up with a down payment, it might be worth asking sellers if they would consider a rent-purchase deal. Even when houses are being simultaneously listed for sale and for rent, the sales listing won't necessarily announce that, so it pays to ask.

Another marketing tactic you may hear more about is seller financing. It hasn't been used much since its heyday in the early 1980s, when mortgage rates in the mid-teens made even modestly priced homes unaffordable.

For sellers, such financing carries risk. There's always a chance the buyer would quit paying on your note. But the risk is manageable if you limit how much credit you extend and if you carefully evaluate the buyer's creditworthiness.

It's an option only for those sellers who do not need all the cash from the sale as soon as possible. Sellers transferring to a less expensive housing market or who are selling a home they recently inherited might be able to take part of the sales price over time. And they stand to earn a good interest rate, as well, most likely more than 7 percent.

This is not to say you should jump in where mortgage lenders fear to swim. Nor should you try to perpetuate the risky lending practices that caused the subprime mortgage mess. But offering to take part of the down payment in monthly installments through a second mortgage might tip the buyer's decision toward your home.

Brenda C. Small, managing broker of Prudential Carruthers Realtors in Chevy Chase and president of the Greater Capital Area Association of Realtors, said she doesn't expect to see many offers of seller financing, in part because there still are a lot of options available from lenders.

Another hindrance is unfamiliarity. "A very small percentage [of sellers] would be able to do that from a financial standpoint or a knowledge standpoint," she said.

However, Kevin Connelly, Arlington branch manager for BB&T Mortgage, said he thinks there is "renewed potential" for seller financing, in particular as a way to avoid the higher rates on jumbo loans above $417,000.

"Credit is still available, but guidelines are tighter and rates are higher," he said.

Even though the credit-market spasm of August has eased somewhat, rates on jumbo loans are still three-quarters to seven-eighths of a percentage point higher than on smaller loans that are eligible to be sold to Fannie Mae and Freddie Mac, which repackage them for the bond markets.

For example, Connelly said, say a house cost $521,200. The buyer could make a 5 percent down payment, $26,050, and take a conforming mortgage for $417,000. The seller could finance the remaining 15 percent of the sales price, $78,150.

That also avoids private mortgage insurance, required on most loans when the buyer makes a down payment of less than 20 percent.

Lenders have been offering these "piggyback" first- and second-lien combos for years. But a seller might be able to charge a little less interest than a lender would now, or be somewhat more tolerant of small credit blemishes.

Any such private financing must be done with the consent of the lender making that big first mortgage. A good loan officer will be able to advise you on how to structure it properly.

Sellers should insist that the buyers provide them all the same documentation given to the first-mortgage lender. That includes copies of their credit reports, loan applications and proof of income. The title company handling your closing can, for an extra fee, prepare the mortgage documents that give you a lien against the home. Keep in mind, though, your ability to get back an unpaid debt through foreclosure would be limited because you would be second in line, behind the holder of the first mortgage.

"It's a great tool to offer that may allow this property at least to be noticed," Connelly said.

Certainly, sellers these days welcome any edge they can find. But I think seller financing might be a better tool when used sparingly. Perhaps a buyer has enough cash to put 15 percent down. The seller might agree to lend the remaining 5 percent to reach that magic 20 percent level that negates the need to spend hundreds of dollars a month on private mortgage insurance. Offering such financing help could be a good alternative to lowering the price by a comparable amount.

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