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With interest rates skyrocketing and homes sales cut nearly in half we’re back to an era of creative financing. You’ll probably see more of this in coming months.
Creative financing was popular back in the ’70s when Jimmy Carter occupied the White House. Rates soared into the double digits back then, hitting as high as 18.5 percent. That opened the door for home sellers to carry the contract on the sale of their home. They benefited with extra cash from the interest, instead of the bank. It also ushered in new language in mortgage contracts: the due on sale clause. That meant when the home was sold, the loan was due.
To get around that, a number of schemes rose to the top. I remember selling a house back in 1979 where I carried the down payment at 1 percent a month, or 12 percent a year. My uncle, a Realtor, helped me set it up so it was perfectly legal. I didn’t become a Realtor for several years later.
Buying my next house
Then I turned around and bought my next house, also using creative financing. I paid $1,000 down and assumed his VA loan, which you could do back then. The seller carried the note for three years, which was the time frame I was carrying the note on the home I sold. I structured it with no payments until it came due. Fortunately, the note I was carrying matured a few months earlier. So, I socked it away in a CD, then paying 8 percent interest. I earned an extra $300 in just a few months.
Another way of dealing with the due on sale clause is the contract for deed. If you’re having trouble selling and you’re thinking about renting it out, this may be a better solution. You’ll get monthly income without having to deal with landlord-induced maintenance.
With this method you don’t relinquish the title until the note is paid. Here’s what a contract for deed (CFD) could look like: on a $625,000 purchase, you would ask for a hefty down payment, about 10 percent to 20 percent. So, from $100,000 to $125,000. Then structure payments with a lower than market interest rate, say 5.9% interest rate for 30 years, all due in 5 years. With $100,000 down, you would receive monthly principal and interest payments of $3,113.97 (estimate). Again, you do not transfer title until the note is paid in full, although it is recorded.
Offer interest below the prevailing rate
You offer a low interest rate because interest is taxable income, while principle is not. Keep it low and you will drive more buyers your way and avoid high taxable income. Remember, you’re selling on terms, not price.
With a $100,000 investment, the buyer has more skin in the game.
But how about the appraisal? With a CFD you won’t necessarily need an appraisal. For one thing, you’ll likely sell your home for more than it would appraise for anyway. The buyer is looking at terms and buying on future appreciation.
Also, your buyer must get a pre-qualification letter from a lender to show when they will be able to refinance out of it. That information must be in the pre-qualification letter. As your Realtor® I will see to that, as well. Then, down the road when your buyer wants to re-finance out of the deal at the end of the term, and if it doesn’t appraise, be ready to extend the contract. You may want to build in an automatic extension just for that scenario.
Don’t try to skip the attorney
A savvy attorney must be involved to set up a CFD. I work with an attorney who specializes in contract for deed sales. In fact, he gave me this information. He charges $425 to set up a contract for deed per side.
I mentioned that a CFD is recorded, although you must use a title company that knows how to close these deals with all the legal documents in place. The attorney I work with also owns the title company that closes the deal. Not every vanilla title company knows how to do this. I keep his contact information proprietary.
Payments are not made to you, but to an escrow company, which, in turn will handle the details. If the buyer defaults you can take back the property easily through a default remedy, which is a 30-day forfeiture, rather than a full judicial foreclosure.
Where to begin: to take advantage of this way of selling I must list the property on the MLS as a contract for deed sale and handle all the marketing. You don’t want to attempt this on your own. Just schedule a short, 30-minute appointment to see our dynamic marketing plan, a mix of Internet, print and television to help you make an informed decision.
You can reach me at 801-360-9133.
