This post first appeared in the June edition of: Cirios Trends: Finding Real Estate Opportunities.

As the aftershocks of the housing crash continue to rumble through the mortgage market, many home sellers, from investors to individuals, would be wise to look into the benefits of offering seller financing to sell their properties. Seller what?

Seller financing is precisely what the name implies: The seller of a property offers prospective buyers not just the house, but financing too. Rather than taking out a traditional mortgage, the seller would issue a note obligating the buyer to repay a certain amount at a certain interest rate, just like a regular mortgage. Terms, including down payment, interest rate and repayment period, are negotiated directly between buyer and seller.

This is by no means a simple transaction and should be entered into only with the guidance of an expert, but seller financing carries potential benefits for both buyers and sellers.

While some real estate markets are in full recovery mode, certain market segments remain slow and illiquid. There are many reasons a home will not sell, but one of the primary factors is a lack of qualified buyers. In today’s market, a qualified buyer is defined as someone who can afford to make the monthly loan payments, can post a 20% down payment and has a high credit score.

Buyers not meeting these criteria are essentially locked out of the market, since private lenders are still charging outrageously high rates and fees.

A logical alternative for home buyers and sellers held hostage by the current lending market is for the two parties to negotiate directly and agree upon terms that work for both parties. Sellers can open the marketing of their property to a wider buying pool, potentially increasing the purchase price. Buyers with dinged credit or who otherwise don’t fit inside the ever-narrow mortgage guidelines can still participate in the housing market by buying a house with seller financing.

For the seller, rather than rolling sale proceeds into the stock market or a low-yielding CD, he or she can create a financial instrument with a consistent rate of return commensurate with secure corporate bonds. And even though the value of the underlying security (the property) could fluctuate and even go down, how good do you feel about the balance sheets of the companies whose stock you own? There are risks in issuing a mortgage to someone to buy your house, but the risks are tangible and often easier to wrap your head around than the volatile stock market.

Seller financing actually happens all the time when big banks and investment companies buy or sell assets. For example, when it was still an independent company trying to raise cash against the backdrop of a collapsing financial system, Merrill Lynch infamously sold various collateralized debt obligation investments for 17% of their face value. The move shocked markets, as all of a sudden the rest of Wall Street had to reprice their assets to this new, dramatically lower level.

Behind the scenes, however, the trade indicated that market conditions were far more dire than they seemed. Merrill offered cheap leverage to the buyer of the assets, enabling the buyer to put up almost no down payment yet still make the purchase.

Merrill, desperate to shore up it’s balance sheet, could book the sale and remove the assets from its books. In their place was a shiny new loan. However, since it would be forced to take back the assets if the buyer (now borrower) defaulted, Merrill really hadn’t unloaded any of its risk.

The lesson here is that seller financing should only be undertaken by parties familiar with the risks and potential benefits of this sort of transaction. This knowledge can be learned though, so even if you didn’t understand a thing you just read, don’t be disheartened.

A good real estate or financial professional should be able to walk any buyer or seller through the logistics of seller financing. Sellers should know that they do retain the risk their property may depreciate, but can also earn a solid rate of return with the possibility of selling their home at a higher price.

Buyers have another option if they get turned down by the bank, even though it is likely to be a more expensive one.

Below is an actual job posting from a brokerage whose stated goal is to “to provide Bay Area home buyers a unique and comprehensive resource for your home purchase process.”

The question you have to ask yourself is this: Is the person who meets these qualifications really who you want advising you on one of the biggest financial decisions in your life and helping you find the home you will live in for at least 5 years?

JOB REQUIREMENTS

• The drive, desire and effort necessary to succeed in real estate sales.
• Aggressive and consistent follow through with clients.
• An effective system to develop your own clients in addition to the clients provided by the company.
• Representation of buyers throughout the Bay Area.
• Willingness to follow company protocol and standards.
• Ethical real estate practices.

COMPENSATION:

Commissioned sales position.

—

Not a single requirement mentions looking out for the home buyer’s best interests or a willingness to put in the extra effort to ensure clients make the best home buying decision possible. In fact, if the posting were for a used-car salesman, would the requirements be any different?

What if the posting looked like this:

JOB REQUIREMENTS

• Ability and desire to offer customized advice based on an individual’s situation, enabling them to make an informed real estate decision (not necessarily a purchase).
• A background in property valuations, mortgages and real estate so you can provide assistance from loan pre-qualification through post –purchase home ownership assistance.
• Defined negotiating skills so you can help your clients get the right home at the right price.
• High personal integrity that allows you to inform clients when buying a home is not their best financial option, because our clients trust us to give them sound financial and life advice - not a sales pitch.
• Ethical real estate practices.

COMPENSATION

Fixed compensation and bonuses based on the team’s ability to help buyers find the homes that works the best for them.

Isn’t it about time we required more from real estate agents?

By RYAN TAYLOR

Looking at real estate from the perspective of an investor, it’s easy to forget that behind each transaction is an intensely emotional decision - often one that is life changing for the buyer. Not only do people want to buy a home to grow their wealth but they also want a place to raise children, be close to friends and enjoy the nuances that make a home special to them.

And while we use many different tools (Google Earth, Realty Trac, Trulia etc.) to value a home, it’s nearly impossible to know what intangible aspects of a house adds value to you, the buyer. The concept of your own personal preferences when it comes to a residence is “Your Value”.

One of the main reasons real estate will always be an imperfect market is because of Your Value’s influence on the market. It is impossible for the rest of the world to know when a house that’s for sale is next door to YOUR best friend or within walking distance of YOUR job. In both these cases, because of the intangible benefit that creates an increase in Your Value, you may be willing to pay more than the typical buyer for that particular home. As well you should.

In a declining market, Your Value becomes more important because the decision to buy a home is so much riskier from a financial standpoint. Buying a house is a big decision at all points in time but it is never more profound than in a market where your new home is likely to be worth less than you paid in a short period of time.

Now, more than ever, you should be uncompromising as a buyer. The home you are looking for should be well defined –

TOO Broad: A 3 bedroom single family residence in San Mateo
TOO Narrow: 1234 Main St, San Mateo, CA
Perfect: A 3 bedroom home with a large backyard and updated kitchen between the 101 freeway and the 280 freeway.

Think about it this way – if you had $500,000 cash and you were going to spend it all on something, wouldn’t you require it to be perfect or close to it!? Well, that is exactly what you are doing when you buy a house — you just get a bit of help from the bank on the cash part.

The reality is that you should always be willing to pay up for the house that fits your parameters. As any good real estate agent will tell you, you should never purchase a home that you do not see yourself living in for at least 5 years (in this market, preferably 10 or more). With this thought in your mind, having a clear understanding of what constitutes Your Value is critical when looking to buy a home.

While we continue to believe it is a risky time to buy a house, we understand that there are certain properties that meet or exceed your every expectation. It’s very possible this home will not be available when market conditions have improved and risk has fallen. When the home is affordable for your situation and Your Value is reached, it might just be time to buy.

And while that doesn’t mean you should rush out and start bidding on properties that you convince yourself are “perfect,” it does mean finding the right property, at the right price, even in this market, is certainly possible.

But before you hit the Saturday open houses with your neighborhood Realtor, ask yourself this very important question: Do You Have a Friend in the Real Estate Business?