Creative Home Selling - Taking A Lesson From Wall Street
In today's tough real estate market, where Sellers seem to far outnumber Buyers, it is important to have a complete "bag of tools" when you desire to sell a home in Florida.
Creative Financing - A Required Skill For Realtors
Today, I will focus on an instrument that is fairly common on Wall Street that we do not see very often on "Main Street," and that is the Zero Coupon Bond. For those readers who do not invest their money in bonds, I will briefly define a zero coupon bond as an investment that generates no monthly payments, but rather accumulates interest and is repaid in full, plus interest, on a future maturity date. If you would like a much better definition of the zero coupon bond, just follow the link preceding this to the Wikipedia site.
So, how do we apply the zero coupon bond to selling a home in the Tallahassee real estate market?
The best way to explain this is with a real world situation in which two excellent Joe Manausa Real Estate Realtors were able to creatively sell a home that had been on the market for a rather long-time.
We had a home on the market (names and dollar amounts have been changed to protect the sensitivity of the transaction) listed by our office which had been listed by a previous office for nearly one year. The Sellers (Mr. and Mrs. Seller) were in desperate need of a sale, as they had already committed to moving out of the Tallahassee real estate market. They owed $400,000 and felt they needed at least $50,000 to purchase their new home in the next market. While they had a $600,000 appraisal on their home, they had failed to get it sold while listed previously at $575,000.
We explained to Mr. and Mrs. Seller that they were seeking to sell their home to a very tiny portion of the home buyers in Tallahassee. With our median sales price being less than 1/2 of what they were seeking, we felt that the Sellers needed to do some creative marketing and offer creative financing in order to attract more buyers. We have learned that many more buyers exist for a home if we can satisfy one of two problems, cash issues and/or credit issues. A buyer with cash issues has good credit and can afford to make a home payment, he just does not have the required cash to close on the transaction. A buyer with credit issues might have plenty of cash, but might not have the credit to qualify for a loan or might lack the income required to make the entire mortgage payment.
Selling A Home With A Zero Coupon Bond
We offered the Seller's home for sale at $560,000, but put the word out through our network that creative financing was available. In fact, a buyer could buy the house for $560,000, but have payments as if he had only paid $500,000 for the home! How is this possible....enter the zero coupon bond.
We found a buyer who very much loved the home, but fell short of qualifying for the home due to income restraints. This buyer had very good credit and had sufficient cash to close on the home, but not enough cash + borrowing ability to get it closed. So here is how we structured the transaction:
The Seller was able to walk away with nearly $56K from this sale, more than enough to close on their new home. Additionally, they were able to realize the top amount of money (full asking price) for their home.
The buyers were able to buy more home than they expected, while keeping their payments at a with which they were comfortable.
So what were the terms of the zero coupon bond? The Sellers and the Buyers agreed to $65,000 at 3.25% interest for ten years. That means that the Buyers will owe $89,500 in ten years. Should the Buyers refinance or sell the property prior to that, they will be required to repay the entire principal balance ($65K) plus the accumulated interest at the time of the refinance or sale.
This transaction worked out very well for both parties. We continuously seek to find "win/win" solutions so that we can help Sellers out of their homes by bringing more potential buyers to a market that is currently heavier on housing inventory than it is on active buyers.
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I have read some of your creative financing posts and find them very interesting. I am in a situation right now where I'd like to buy a land lot in Georgia to build on within the next year. The lot we want is $45000 and all the lending institutes I've spoken with want 25-45% down no matter what our credit is. By the way, our credit is good. We have plenty of money to make the monthly payments, but we don't have the money necessary for the down payment. Also, we will be getting a construction loan in the next 6-9 months that will then pay off this land loan and add it into the new mortgage to include the house. This lot has been on the market for a long time and is a bank owned foreclosure. We were hoping to get a loan with 0-3% down and the seller pays all closing costs. Do you have any suggestions? Please email me with your response. Thanks!
Thanks April. I have posted a reply to this at http://www.manausa.com/blog/buying-property-with-creative-financing.html.
Good evening Joe:
I have read your article on the sell with the Zero Coupon bond. But, I don't understand. Could you explain further how the bond part works? I am in a simiar situation.
I would need to more from you to answer your question. Send me an email at [email protected] and let me know your specifics and I will do my best to help you.
I can't help but wonder what the sellers would have chosen if a competing offer for $530 - $540k that was traditionally financed was also on the table.
I guess I can see the collection on this bond going one of three ways:
1. The new owner stays in the house, saves up and in 10 years pays as agreed.
2. The new owner sells the house and from the proceeds pays as agreed.
3. Something else happens
Obviously, 1 and 2 are not a problem, but if for whatever reason, the buyer does not pay as agreed in the next ten years, the sellers may have to foreclose to collect on the note, which would be a very big hassle for them.
Any way, it would be an interesting decision - how much is avoiding the collection hassle worth?
Thanks Dan, I think that's the rub ... this was written in 2008, and there weren't competing offers. At that price point, there likely would be no competing offers today. Cash is king, take the cash offer if it exists ... but creativity is needed for when the cash offer is missing.
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