In This Chapter

The exhaustive job of seeing to every possible contingency and agreeing to every little element of the deal is near an end. The price is right, you’ve negotiated everything down to the doorknobs, and both you and the buyer appear committed to doing what needs done to see the deal to completion.

But still a few wrinkles remain. Unlike other topics covered in previous chapters, these may not necessarily be deal killers in and of themselves. Rather, these are options, elements to a deal that are often not a part of many conventional arrangements. But no matter how unusual, they can help a deal move forward by introducing fresh solutions to problems that can plague many deals.

Consider these alternatives as a baseball manager might consider a reliever—something to turn to if business as usual becomes a problem. Used appropriately, they can play their own roles in moving your home sale closer to completion. And, given their complexity, make sure to consult your attorney at every step along the way.

As we’ve covered extensively in previous chapters, obtaining suitable financing—and all that requires—is often the most significant hurdle in a buyer’s ability to afford your home. And, as we’ve discussed, there are many paths toward that ultimate goal, from alternative financing to third-party down payment assistance to private mortgage insurance.

But, sometimes, all those alternatives simply aren’t enough—or, by the same token, are not attractive to the buyer for any number of reasons. And the inevitable issue crops up—would you, as the seller, be willing to consider financing a portion of the sale of your home?

Owner financing basically means that, like a bank or other lender, you’re willing to agree to be paid over time, rather than receiving a lump sum of money upfront. In effect, you are making a loan to your buyer, including an interest rate and a specified period within which the overall loan amount must be paid back, including interest. Owner financing can coexist with whatever other loans a buyer may take out to buy your home.

Happily, as of the writing of this book, interest rates are still hovering around historical lows. That, unto itself, has helped millions of people buy homes that, under less favorable interest conditions, they would not have been able to afford.

But we’re still not in real estate fantasy land. Let’s face the facts. If you factor in closing costs, the burden of amassing a down payment, paying a real estate commission (if the buyer happens to be using an agent), and other expenses, obtaining a conventional mortgage to cover the purchase of a home isn’t a sure thing by any means.

The following list highlights some of the advantages to consider if a buyer inquires about having you help them finance the purchase of your home:

As you can see, if the mortgage extends for the complete 30-year term, your initial offer financing investment of $30,000 becomes $79,246—almost a $50,000 profit. The greater the loan offered, the greater the potential profit.

Not a bad bit of change, is it? Not only that, but it’s a win-win situation—you pocket a nice bit of regular income while your buyer gets a home that she otherwise might not have been able to afford.

Of course, owner financing is not without its potential drawbacks and concerns as well. Here are a few that are well worth considering:

The criteria for effectively evaluating a buyer for owner financing is monkey see, monkey do. If a lender—a banker, a savings and loan officer, or someone else—follows a particular regimen in sizing up a loan applicant’s ability to pay back a loan, you should do precisely the same thing.

In fact, in your own way, you’ll likely have to do more than some lenders because of the particulars of offering owner financing. Here are a few rules of thumb with which to start our discussion.

First, know that it is very, very unusual for a buyer to ask an owner to fund the entire purchase of a home. Under this scenario, the buyer would put down whatever payment he could muster, and the owner would agree to carry the remainder of the mortgage balance—exactly as a lending institution would. This arrangement may also be referred to as a purchase money mortgage.

If the notion of financing your home in its entirety makes the hair on the back of your neck stand up on end, trust in that response. There are a couple of overriding hurdles from the get go. First is the matter of cash. By financing the purchase of your home completely, you’re foregoing a great deal of upfront funds that, as we pointed out earlier, you may need for some other use. The greater the amount financed, the less cash on hand you have for the closing. That can have some unfortunate consequences, such as forcing you to pay private mortgage insurance on a subsequent home because you didn’t have enough cash from your prior sale to put down at least 20 percent.

The other concern is the onus it places on you to investigate the buyer as thoroughly as possible. With this scenario, we’re not talking about a small portion of the mortgage—we’re looking at the whole thing. And that makes it supremely important you do everything in your power to ensure that a loan of this significance is as safe as possible.

That makes a second mortgage a far more likely—and from your perspective, far more realistic—possibility with which to offer owner financing.

Here’s an example of how a second mortgage may come into play. A buyer expresses an interest in buying your home for the asking price of $250,000. She’s prepared to put down the requisite 20 percent down payment, which translates to $50,000. That leaves a $200,000 balance, but upon applying for a conventional mortgage, the buyer discovers the bank is only willing to approve a $180,000 loan. The buyer then approaches you about your willingness to fund the remaining $20,000.

The most compelling reason to provide owner financing is the deal that simply will fall apart without it. Perhaps your market is tight, offers have been few and far between and your providing a second mortgage is the last big step in the process. Granted, you may be leery about this—and justifiably so—if a bank has turned them down for every penny they may need. But, bear in mind that banks are purely formulaic—although the numbers and formulas may suggest otherwise, many people are, in fact, able to afford more than what the formulas dictate. Perhaps they’re expecting a pay raise or an inheritance—factors that can’t go into the calculations a bank makes. So, while the formulas may say no, owner financing can and does work.

With this sort of situation—or one close to it—a few ground rules are useful to follow:

A buyer obtaining owner financing is adding to her overall debt level—something with which a primary lender may not be comfortable. If you’re thinking about owner financing, make sure your buyer provides you with a letter from the lender confirming that a second mortgage will not adversely affect their primary loan.

If owner financing seems a reasonable option for whatever reasons, it’s time to assume the duties of loan officer. That means you need to evaluate your buyer’s capacity to honor the loan terms on which you agree. Here are some step by step suggestions to make that process as systematic and reliable as possible:

If, when all is said and done, you determine your buyer is worthy of the second mortgage, talk to your attorney about drawing up all necessary paperwork related to the deal, including a note and necessary second mortgage documentation. This must be signed by the buyer at the closing and recorded alongside any other papers relevant to the sale.

The bottom line to investigating and setting up owner financing is to take the process as seriously as any other element of the sale of your home. Even if the amount is relatively modest, do your due diligence to make certain this element of the deal, however small, is carried off as reliably as any other part of the sale.

Occasionally, it may be your bad luck to be stuck in a home selling market that makes a garden slug appear downright dynamic by comparison. Homes, for whatever reason, are simply not moving, and even financial carrots, such as owner financing, are not adequate enough to entice interested buyers.

Happily, however dire these conditions may be, they are not without their remedies. One such option is a lease option or rent to own arrangement.

On the surface, this sort of an arrangement may seem to smack of desperation. That all depends on your definition of desperate. If, by chance, you’re mired in a deadly housing market with nary a nibble in sight, then, yes, a rent to own setup may seem like the final straw.

But there are other ways to look at it as well. For one thing, if you have to move quickly, a rent to own offers yet another possibility to, at least in part, come up with some sort of arrangement that gets you out of your home. And, it can also be advantageous from the buyer’s point of view as well. Many prospective buyers who simply lack the necessary upfront cash to meet down payment or closing costs may find a rent to own a godsend.

A global issue to be aware of, though, is that a rent to own setup is not the same as a simple rental arrangement. With the latter, you pay your rent and you get to stay for 30 more days. A rent to own is more involved. For one thing, the agreement often stipulates that the renter has the option of buying the home during any time in which the agreement is in effect. A rent to own can also be more costly upfront to the renter because he generally pays a one-time fee in return for your agreeing to the rent to own arrangement.

Finally, a conventional rental payment is money paid to occupy a home and nothing else. A rent to own payment, on the other hand, can often apply—in whole or in part—toward a down payment. In effect, a rent to own allows a renter to slowly amass the funds needed to compile a down payment with which to buy the home.

Another part of a rent to own agreement is a contract to purchase. This, in effect, is part of the rental agreement and spells out the various terms and conditions if a renter opts to pursue outright purchase of the home.

The contract element of a rent to own can be a bit dicey as it can involve a fair amount of negotiation. For one thing, you need to determine what the one-time upfront fee should be as well as the monthly rent. By all accounts, there’s little precedent here, so it’s pretty much up to you. On top of that, you have to decide what portion of the rental payment is purely rent and what can apply toward the down payment.

Another consideration kicks in when the period in which the option to purchase expires. Because no rent to own contract goes on without end, sooner or later a buyer will have to decide whether to exercise the buy option. In many ways, the rent/down payment split that every payment represents works in your favor. If a buyer chooses not to buy, he, in effect, is giving up that portion of his payments that would have gone toward a down payment. That can provide a fair amount of leverage to convince the buyer not to throw that money away and, instead, choose to buy the house.

The other unpredictable part of rent to own is the purchase price that you established when you drew up the contract. If, by chance, your house goes way up in value during that period, your renter has a bargain if she chooses to exercise the buy option. But, if prices drop, a renter exercising the buy option will pay you a price that’s greater than what the home might actually be worth at the time.

Still another option for the cash-strapped buyer—not to mention a particularly aggressive seller—is equity sharing. Here, the ownership of the home is shared. The buyer may occupy the house, but you, as the seller, retain at least a portion of ownership.

Equity sharing can work out in a variety of ways. For instance, you, as the seller, may agree to provide the down payment and even the closing costs, while the buyer (kind of a loose term in this particular situation) agrees to make the monthly payments. Another alternative has the parties sharing all expenses, from down payment to closing costs to mortgage payments and property taxes.

In fact, equity sharing can consist of more than just one buyer and one seller. Additional buyers may contribute in some fashion, perhaps by helping out with mortgage payments or contributing something to upfront costs (it’s very popular with parents looking to help their kids with the expense of buying a home). In fact, in some parts of the country where the cost of homes is prohibitive to many buyers, you, as the seller, may not even be in the mix at all. Cash-strapped buyers look for investors to provide upfront expenses in return for a stake in a home whose value will hopefully increase over time.

One advantage to you as the seller is that equity sharing opens up another avenue to move your home—a plus in slow markets or in circumstances where you have to move quickly. Another plus is that it positions your home as an investment without you having to assume all the risk. After all parties involved agree to sell the property outright—or one party decides to buy out the other partners—the proceeds of the sale are split. If you’re in a good housing market, that can mean a tidy profit.

There are, of course, downsides to equity sharing. First, like other alternatives, it doesn’t solve the problem if you need a good-size amount of cash-in-hand to buy your next home. And, as can be the case when you have someone else occupying a property in which you have a financial stake, you are putting a degree of trust into someone else. Not only do they have to meet all their financial obligations, they’re also bound to keep the property in good shape.

Another circumstance that may crop up is a buyer’s request to move into your home before the closing. This can happen for a variety of reasons—maybe the buyer has already moved out of her prior home and is in housing limbo (that cheapo motel is fast losing its romantic charm). Perhaps they’re moving a great distance and would simply enjoy settling directly into their new home. By the same token, it may appeal to you as well. Perhaps you’ve already moved out and the house is just sitting there. From your perspective, it’s better to have a warm body in there than just leaving it empty.

Whatever the reasons are to make it a worthwhile idea, occupying prior to closing is a fairly unusual concession in home selling—and for very good cause. The biggest and most compelling is that the buyer gets a first-hand, up close and very personal view of the home she’s buying. And in this case, familiarity can cause problems. The buyer may see cracks in walls she never saw before, the hot water in the shower takes forever to kick in, and on and on with a litany of complaints. That can lead to requests for repairs and other concessions.

If all this scares you enough, just say no if a buyer requests occupancy prior to closing. Enough said. Unfortunately, there are instances where it seems unreasonable to keep your buyer in housing no man’s land. If that’s the case, ask your attorney to draft an occupancy agreement that covers the period prior to closing. Among other major features, the buyer must agree to accept the home “as is” at the time of occupancy; the buyer should offer some form of compensation; and the buyer should have all necessary forms of insurance in place prior to moving in.

Okay, the time has finally arrived. After a good deal of haggling and negotiating, you and the buyer have agreed on every last detail of the Purchase and Sale Agreement.

Time to put your John Hancock on the document. And as always, there are a few guidelines that are prudent to follow.

First is the number of copies. You should have at least two original copies of the Purchase and Sale Agreement—one for you and one for the buyer. Make sure these are not photocopies, but originals. You may want to make additional copies for your attorney. The buyer may want to make additional copies for his own records or, perhaps, to provide to any lender who may be financing the sale.

When possible, it’s usually easier to have both buyer and seller meet to sign at the same time. Things go much faster and you, as the seller, can collect any deposit that the buyer may owe on the spot.

The logistics of the signing can depend on the circumstances. Sometimes, it’s impossible for the Purchase and Sale Agreement to be signed by both parties at the same time, face to face (such as the case of an out-of-town buyer). In these cases, the buyer usually signs first, then forwards the documents to you for your signature. After you sign them, you can collect any deposit checks that may be due you.

Here are a few websites that can offer additional details on alternatives to conventional home sales:

The Least You Need to Know