This is my column for this week from the Arizona Republic (permanent link):
Seller financing can give you an edge over your competition in the Phoenix real estate market
If you have significant equity in your home, you have a potent weapon at your disposal on resale.
The big news this year is likely to be more and more stories of people with little or no equity trying to get their homes sold. Values for an average suburban Phoenix home were down 14.66% year-over-year. That doesn’t sound too bad, but prices were down almost six percent just in December. We’re down 24% from the peak in December of 2005, on average.
But here’s the silver lining: If you bought that average home in December of 2003, and if you resisted the impulse to refinance your loan, you’re still up over 40% from your purchase price.
That equity gives you a source of leverage on resale that you might not have considered.
First, as always, for your home to sell it must be priced right, prepared right and presented right to the marketplace. You can’t do any kind of elaborate negotiations if buyers don’t even see your house.
But because you have equity in the home, you have the ability to help a willing buyer navigate the suddenly-more-perilous shoals of the lending process.
Suppose your buyer has five percent for a down payment, but the lender is willing to make a much more attractive deal for ten percent down. If the lender is willing to accept the arrangement, you can offer to carry back a note for the extra five percent, using part of your equity as seller financing.
You’ll be taking a second or third position in the line of creditors, should the buyer default — and it’s always possible that you will lose every cent you are lending. But given the direction of the market, you could be a lot better off risking five percent now, rather than accepting ten percent less a few months from now.
As with everything, read the fine print, ideally in the company of your accountant. But seller financing is one more weapon you can deploy to set your home apart from the competition in this very competitive market.
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Jeff Brown says:
I’ve been wondering lately just when the first owner carry back post was gonna appear. 🙂
The seller can put themselves in an even better sales position via the terms of the sale. No payments the first six months. Very low interest, graduating slowly up. There are a bunch.
Frankly, I’m pretty surprised this isn’t happening proactively from the buyer side on a wholesale level.
You’ve sold a few dozen homes through this post — good on you Greg.
January 12, 2008 — 11:15 am
Robert Kerr says:
But here’s the silver lining: If you bought that average home in December of 2003, and if you resisted the impulse to refinance your loan, you’re still up over 40% from your purchase price.
Off-topic, but needs to be said: That silver lining is evanescing. Fast.
I’ve looked closely at Phoenix and there are just no signs of the correction abating.
At the present rate, prices will be right back down to pre-bubble plus inflation in 18-24 mos, maybe even lower.
January 12, 2008 — 7:47 pm
Dawn Rickabaugh - Pasadena Note Queen says:
It’s always great to see someone writing about ways that deals can be put together regardless of what’s happening in the market.
When the mortgage industry fails to function, flexible sellers can create their own liquidity and do a lot to mitigate the damage in the overall marketplace.
I agree with you that it’s better to risk 5% than 10-20% depreciation. Another way to put the above deal together would be for the seller to wrap the underlying mortgage (providing they had good long term financing in place), or . . .
Have the buyer get a loan to replace the existing mortgage and then have the seller carry back a more substantial second.
That way, they have a note that’s actually worth something in the secondary trust deed market if they ever need to sell all or part of the note for cash.
April 16, 2008 — 7:05 pm