Jack and Mary were desperate. Mary received a big promotion in another state and Jack was looking for a new job in the same city. It was just too good to pass up. Mary was a rising star in the health care industry and with the huge pay boost and promotion it was a job she had dreamed of ever since leaving graduate school armed with her MBA. Jack was a natural born salesperson and could work anywhere selling just about anything. He liked high tech sales in the high ticket electronics field and was close to catching on with a company in the same city as Mary’s new job. One problem, they had a large house to sell in a very slow and slumping real estate market.
Jack and Mary counseled with the local real estate ace that had long been the resident expert Realtor for their community. They had been in their home for six years and with the past real estate surge they had lots of equity now. Because this was happening so fast, Mary moved to a small apartment near her new job. The relocation price offered by the company was way too low for what they felt they could command in the market. This option was rejected. With ongoing brain storming with Tyler the Realtor, the scenarios included, lease options, lease purchase, and a seller held second. The lease scenarios would be the iffiest of the three. Jack and Mary instructed Tyler to hold the price and offer to pay the selling Realtor a selling fee plus a bonus of $2,500 and agreed to pay the closing costs and prepaid expenses (pre-paid interest, tax and insurance escrows) up to an offered $14,000. Likewise, Tyler was instructed to offer through the MLS selling terms to include a seller held second of 5% to 10% of the purchase price. The list price of $475,000 would mean that the Jack and Mary were willing to hold a second mortgage of 5% Loan To Value (LTV) or $475,000 x 5% = $23,750 or 10% LTV at $475,000 x 10% = $47,500.
Tyler, the listing Realtor, had been in discussion with a mortgage broker active in their area and had some clients that could only get a 90% to 95% LTV first mortgage. They had some credit dings, which were holding them back. Each had fully documented income and was making good money. There were valid reasons for their rocky credit history and both needed time to rebuild their credit. Tyler showed the home to both the prospective buyers who had credit challenges. The first couple didn’t like the kitchen layout or the back yard size. The second couple liked the house and had similar reservations but with the flexible financing they figured they could live with it and make changes and improvements down the road when they could refinance down the road and get sufficient monies to do some home improvements.
Jack had closed up the house and had moved with the furniture in tow to join Mary at her new location. The furniture was put into storage in hopes that it wouldn’t be there long with Realtor Tyler on the case. Jack had been actively working on his job hunt in the new city for two weeks now. Tyler was now on the phone presenting the offer from the buyers who needed seller help. The buyers would need Jack and Mary to pay $15,000 in closing costs and prepaid expenses. Tyler was making the deal himself so there was no bonus involved. The offer was based on a seller held second mortgage of $47,500 with an interest rate of 10% with a 30-year term and a three-year balloon. The payments would be $416.85/month. At closing, Jack and Mary would payoff their first mortgage of $200,000 and would get somewhere around $188,000 in cash at closing and the seller held second of $47,500.00 paying $416.85/month. Tyler went on to explain that the buyers were putting very little of their own money in the deal and explained the downside risk involved if the buyers defaulted. The only way they could protect their 2nd mortgage equity would be to buy in the first mortgage or just take the loss. Tyler and the mortgage broker, with the buyer’s permission, indicated that Jack and Mary were in essence underwriting the 2nd mortgage loan on part of the buyers. It was up to them to pass or deny.
On weekends Jack and Mary were looking at new homes, which might meet their needs. One in particular, due to the soft market, the builder was offering major concessions and sales inducements including paying all the closing costs and prepaid expenses. With potentially $180,000 cash available for any purchase they were looking at a builder deal loaded with incentives for a home worth $750,000, which they could now buy for $650,000. The nagging fear was what would happen if the 2nd mortgage payer defaulted. Since, it was up to Jack and Mary to pass on the buyer’s credit worthiness, with the buyer’s permission, they went over their entire credit package and personally interviewed them on the phone to find out something of the character of the buyers and the back ground of the of how the credit dings had taken place. It turns out it was a temporary medical problem that had put them behind the eight ball and precipitated their credit dings. Jack and Mary decided to take the deal. Since the buyers had been already pre-qualified, the sale took place in two weeks.
Jack and Mary, with closing funds in hand, closed moved into their new home. Six months had passed and the buyer’s of their prior residence had made their second mortgage payments on time as agreed. The home had everything they wanted in a home except a pool and spa. The dilemma for Jack and Mary, even though they had got an incredible interest rate in the soft market they were reluctant to incur any additional debt with the 2nd mortgage paying off in now 2.5 years. Jack received a letter in the mail from an investment note buyer who was offering to buy the note at a discount since the note now has some “seasoning”. Running the math, with the investor getting a 15%+ yield on a 10% face rate ballooning in the next 30 months were offering to buy the note for $42,900 cash. Just for grins, Jack being the super salesman and dealmaker had been working on construction quotes with a pool contractor. He had managed to negotiate a $5,000 reduction and could put everything they wanted for $40,000. Pool contractors were slow right along with the rest of the real estate market. Jack and Mary showed the documentation to the note buyer that indicated six months of on time payments together with copies of the note and mortgage. The note was sold netting out $42,000 in cash. The pool was built the following week. Life was good.
Soft markets can lead to flexible terms which can help complete real estate deals. Keep and open mind. There is more than one way to skin a real estate deal.